1931 BTA LEXIS 1824">*1824 GAIN OR LOSS ON EXCHANGE. - Petitioner exchanged with the Fishback Company certain real estate and cash for all the common stock of the Fishback Realty Company and a leasehold then held by the Fishback Company as lessee of the "Fishback property" which was the sole asset of the Fishback Realty Company. The parties are agreed upon the "basis" of the properties given in exchange by petitioner. The latter introduced the testimony of three experienced real estate men as to the fair market value of the "Fishback property" for the purpose of establishing the fair market value of the common stock of the Fishback Realty Company, but introduced no testimony as to the fair market value of the leasehold. Held, the record does not show what the fair market value of the leasehold was on the date of the exchange and the Board can not assume that it had no value. Held, further, the burden was upon petitioner to establish the fair market value of both the stock and the leasehold, and, having failed in the latter, the Board is unable to determine whether there was a gain or loss upon the exchange.
23 B.T.A. 820">*820 This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1925 in the amount of $5,641.45. The amount of taxes in controversy is $2,480.50.
The sole issue is whether petitioner sustained a loss upon the exchange of certain real estate and cash for common stock in a domestic corporation and a leasehold.
FINDINGS OF FACT.
Petitioner is an Indiana corporation with its principal office at the Union Stock Yards in Indianapolis.
23 B.T.A. 820">*821 On December 17, 1925, petitioner and the Fishback Company (also an Indiana corporation) consummated an exchange of properties. The net depreciated cost of the properties given in exchange by petitioner was $54,780.77, itemized as follows:
| Kind of property exchanged | Date acquired | Cost |
| Ries real estate | Dec. 21, 1919 | $13,041.02 |
| Durban real estate | Mar. 25, 1924 | 9,000.00 |
| Brewing Company real estate | Dec. 8, 1925 | 19,000.00 |
| Cash | 14,000.00 | |
| 55,041.02 | ||
| Less: Depreciation, Ries real estate | 260.25 | |
| Net depreciated cost of properties exchanged | 54,780.77 |
Petitioner received in exchange1931 BTA LEXIS 1824">*1826 from the Fishback Company, all the common stock of the Fishback Realty Company, and a leasehold then held by the Fishback Company, as lessee of the "Fishback property" which was the sole asset of the Fishback Realty Company.
The Fishback property was a piece of unimproved real estate (200 by 185 feet) on the West side of Delaware Street, between South Street and the Union Railway tracks in Indianapolis. The Fishback property standing by itself was so situated that it was economically impossible to build a switch on it without crossing the property directly adjoining it on the North and South, which adjoining property was owned by petitioner. So-called "switch property" was worth twice as much as "non-switch property."
Prior to the incorporation of the Fishback Realty Company in 1922, the Fishback property was owned by the Fishback Company. In 1922 the Fishback Company organized the Fishback Realty Company and transferred the Fishback property to the newly organized corporation in exchange for all the latter's common capital stock of the par value of $100,000. Thereafter, in 1922, the Fishback Realty Company issued to the public preferred stock of the par value of $105,0001931 BTA LEXIS 1824">*1827 for cash. The preferred stock certificate carried a provision for cumulative annual dividends at the rate of 6 1/2 per cent, payable quarterly, and for the retirement thereof on a specified date. In case of default in performance of these provisions the certificate further provided that the affairs of the Fishback Realty Company might be wound up by receivership or otherwise and its assets reduced to cash.
At the time of the incorporation of the Fishback Realty Companythe Fishback Company entered into a ten-year lease with the newly organized corporation, by which it leased from that corporation the Fishback property, and in consideration for the lease the Fishback Company agreed to pay as rental, (1) sufficient money to pay the 23 B.T.A. 820">*822 dividends and to make the redemptions on the preferred stock, (2) all taxes and assessments against the Fishback property, (3) any income, excise, capital stock, or other taxes and assessments that might be imposed upon the Fishback Realty Company as lessor, and (4) all other expenses of the lessor, including insurance and repairs.
On December 12, 1925, the board of directors of the Fishback Company met and adopted resolutions authorizing1931 BTA LEXIS 1824">*1828 its president to sell, exchange or otherwise dispose of all the common capital stock of the Fishback Realty Company then owned by the Fishback Company, and to sell and assign its rights, title and interest as lessee under the above mentioned lease with the Fishback Realty Company.
On December 14, 1925, petitioner and the Fishback Company entered into an agreement called "Assignment Of Lease," in which the Fishback Company thereby sold, assigned and transferred unto the petitioner all the rights, title and interest owned or possessed by the Fishback Company under the lease it had with the Fishback Realty Company in consideration for petitioner assuming all the obligations of the Fishback Company as lessee under the lease.
On December 17, 1925, the date the exchange here in question was consummated, the amount of preferred stock of the Fishback Realty Company then outstanding and unredeemed was $73,500. During the year 1926 petitioner redeemed and paid off all the outstanding preferred stock of the Fishback Realty Company.
Up to December 17, 1925, the Fishback Company had had no offers of any kind for the purchase of the common stock of the Fishback Realty Company.
The Fishback1931 BTA LEXIS 1824">*1829 property was assessed by the county assessor of Marion County, Indiana, in which county the real estate was located, as of March 1, 1925, at $101,000.
The fair market value of the Fishback property on December 17, 1925, was $109,200.
The fair market value of the common capital stock of the Fishback Realty Company on December 17, 1925, was $35,700.
Petitioner deducted on its income-tax return for the calendar year 1925 as a loss from the exchange of property the difference between the amounts of $54,780.77 and $35,700, or $19,080.77. The respondent disallowed the deduction and in a statement attached to the deficiency notice as an explanation thereof, said: "The alleged loss claimed through the exchange of property cannot be allowed for the reason that the values claimed for the property received in the exchange have not been substantiated."
OPINION.
LOVE: As previously stated, the only issue involved in this proceeding is whether petitioner sustained a loss upon the exchange of 23 B.T.A. 820">*823 three pieces of real estate acquired after March 1, 1913, having a net depreciated cost of $40,780.77, and $14,000 in cash for all the common stock of the Fishback Realty Company and1931 BTA LEXIS 1824">*1830 a leasehold of the Fishback property.
Section 202(a) of the Revenue Act of 1926, provides:
Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over amount realized. [Italics supplied.]
The basis provided in subdivision (a) of section 204 as diminished by the deductions provided for in section 202(b)(2) is the amount of $54,780.77, upon which the parties hereto are agreed.
Section 202(c) provides:
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. [Italics supplied.]
The question thus narrows itself to what was the "fair market value" within the meaning of that term as used in section 202(c), supra, on December 17, 1925, of (1) the common stock of the Fishback Realty Company, and (2) the leasehold which were the properties "(other than money) received."
With respect to the fair market value1931 BTA LEXIS 1824">*1831 of the stock, there were no sales either prior to or subsequent to December 17, 1925, the date in question. Neither were there any offers therefor. Under such circumstances, the rule most generally applied is to determine the fair market value of the assets behind the stock. The only asset owned by the Fishback Realty Company was the Fishback property. As far as the fair market value of the stock is concerned, the question is, therefore, finally narrowed to the determination of the fair market value of the Fishback property on December 17, 1925. In this connection we are satisfied from the testimony of three well qualified and experienced real estate men, who had been engaged in the real estate business in Indianapolis for from 30 to 47 years, that the fair market value of the Fishback property on December 17, 1925, was $109,200, allocated $73,500 to the preferred stock, and $35,700 to the common stock. We, therefore, find that the fair market value of the common stock of the Fishback Realty Company received by petitioner on December 17, 1925, was $35,700.
It does not follow from the above finding that petitioner is entitled to the loss as claimed. 1931 BTA LEXIS 1824">*1832 The burden was upon it to also establish the fair market value of the leasehold which was a part of "the property (other than money) received." See sections 202(a) and 202(c), supra, and . That a leasehold is property is not open to question. , 23 B.T.A. 820">*824 and cases therein cited. At the time of the exchange here in question, the leasehold between the Fishback Realty Company as lessor and the Fishback Company as lessee, had over six years yet to run.
Petitioner owned the land directly adjoining the Fishback property both on the north and on the south. By reason of this ownership, the Fishback property was worth twice as much to petitioner as to anyone else for the reason that it could, in petitioner's hands, be used as switch property. Petitioner, therefore, desired to obtain the use of the Fishback property. If it had only acquired the common stock of the Fishback Realty Company, it could not have used the Fishback property until after the expiration of the then existing leasehold which ran until May 10, 1932. It was, therefore, necessary for petitioner to also acquire1931 BTA LEXIS 1824">*1833 the leasehold, which it did by exchanging for (1) the common stock of the Fishback Realty Company and (2) the leasehold, the amount of $14,000 in cash and three pieces of real estate that had previously cost petitioner in 1919, 1924 and 1925, a total of $41,041.02. No evidence was offered, other than the original cost, as to the value on December 17, 1925, of the three pieces of property given in exchange. Upon this state of the record, we can not assume that the leasehold in question on December 17, 1925, had no fair market value.
The statute is specific as to the necessary facts which must be proven in order to establish a loss. Section 202(a) provides that "the loss shall be the excess of such basis over the amount realized." The parties are agreed that the "basis" here is $54,780.77. Section 202(c) provides that "The amount realized * * * shall be * * * the fair market value of the property (other than money) received." The property received was the stock and the leasehold. We have found the fair market value of the stock to be $35,700, but are unable from the record to determine the fair market value of the leasehold. The burden was upon petitioner to establish1931 BTA LEXIS 1824">*1834 this value, if any, and having failed to do so, we must sustain the respondent's determination.
Judgment will be entered for the respondent.