*1988 1. In a sale of stock in a corporation, basis of gain or loss under Revenue Act of 1921, is the cost of the stock. Where evidence shows stock of corporation was issued to taxpayer for cash, the value of good will, leasehold, and trackage rights alleged to have been transferred to the corporation at or about the same time, by the taxpayer, can not be added to the cost of the stock in determining gain or loss on sale thereof, in the absence of evidence that they were paid in for stock.
2. Held that the respondent was correct in determining that stock held for less than two years did not come within the purview of section 206 of the Revenue Act of 1921.
*1241 In this proceeding the petitioner, who is the duly appointed administratrix of the estate of E. E. Sommers, deceased, seeks a redetermination of the income tax liability of the decedent for the calendar year 1922, for which year the respondent has determined a deficiency in the amount of $16,615.23. Petitioner alleges that subsequent to the receipt of the deficiency letter she accepted certain*1989 adjustments made by the respondent and paid $2,832.68 as follows: 3/13 in 1929, $2,083.97; 5/18 in 1929, $748.71.
The petitioner further alleges that the respondent erred (1) in determining the amount of gain derived from the sale of shares of stock in the Sommers Oil Company and (2) in not applying the capital gain provisions of the Revenue Act of 1921 to the profit derived from the sale of all the decedent's stock in the Sommers Oil Company, instead of to only a part of it.
FINDINGS OF FACT.
The petitioner was duly appointed, by the county court of the City and County of Denver, Colorado, administratrix of the estate of Elmer E. Sommers, deceased, who died June 28, 1928. Sommers had been a resident of Denver for many years. In 1908 he became general manager for the Great Western Oil Company of Cleveland, Ohio, for the district comprising Colorado, Utah, and Wyoming, with the exclusive right to sell and negotiate all business of the company in this territory. Through the personal efforts of himself and associate employees, the business of the Great Western Oil Company in that territory was built up to where it was a prosperous *1242 concern. In 1920 Sommers and*1990 associates offered to buy it for $70,000, but it was sold to the Gates Oil Company for $150,000.
When the Great Western Oil Company was sold to the Gates Oil Company, Sommers was paid $20,000 by the former for certain rights, which in his income tax return for 1920, filed March 15, 1921, he described as follows: "In July 1920, the Great Western Oil Company negotiated the sale of all its interest and good will in Denver to the Gates Oil Company and communicated to Mr. Sommers to the effect that the Great Western Oil Company would donate to Mr. Sommers as a gift $20,000, provided he, Sommers, would cancel his contract with the Great Western Oil Company and put nothing in the way of Great Western Oil Company's negotiations with the Gates Oil Company, and as above agreed, the Great Western Oil Company did give to Elmer E. Sommers the aforesaid $20,000, which is set up in Schedule D-3."
Sommers, when he failed to acquire the business of the Great Western Oil Company, decided to organize a new corporation to enter the same field. He secured the cooperation of the Continental Oil Company, a large producer of the products which were to be wholesaled and retailed, in the organization*1991 of the new corporation. It was agreed between Sommers and the Continental Oil company that Sommers would subscribe for 60 per cent of the stock of the new corporation and the Oil Company the balance. This plan was carried out in the issuance of capital stock of the Sommers Oil Company from time to time, except two or three shares which were issued for directors' qualifying shares. The new corporation, Sommers Oil Company, was organized in July, 1920. Its books show that the capital stock was issued for $100 per share paid in cash and do not record the receipt of any other payment for stock. Nothing was carried on the books of the Sommers Oil Company as representing value of good will, leasehold, or other item of that character.
At the time the corporation was organized, decedent was the owner of a lease on property of the Neef Brothers Brewing Company, of Denver, Colo., which was situated near the tracks of the Denver & Rio Grande Railroad Company, and was also the owner of certain trackage rights secured from said railroad company, all of which were suitable for the wholesale business of the corporation. Sommers transferred this lease and trackage rights to the new corporation, *1992 either by oral or written assignment, but if the corporation paid anything for this assignment, aside from agreeing to pay the rent for the use of said premises, that fact is not shown. Sommers paid in cash for stock in the Sommers Oil Company the following amounts:
| July 17, 1920 | $12,000 |
| August 24, 1920 | 12,000 |
| October 18, 1920 | 18,000 |
| February 1, 1921 | 12,000 |
During the taxable year 1922 the decedent sold all of his stock in the Sommers Oil Company for $142,000. In arriving at the profit*1993 on this sale, the respondent used as a basis the cash paid in for stock in the amount of $54,000. That part of the profit realized from stock acquired in 1921 was computed under the provisions of sections 210 and 211 of the Revenue Act of 1921. The profit on the balance of the stock was computed under the capital gain provisions of the 1921 Act.
OPINION.
BLACK: The two contentions made by petitioner, alleging error on the part of respondent in determining the deficiency, are as follows:
(a) The Commissioner erred in disallowing $75,000.00 for leasehold interests, good will, clientele and going concern value transferred to the Sommers Oil Company in partial consideration for five hundred forty (540) shares of the stock of the Sommers Oil Company, as part of the costs of said stock, for the purpose of ascertaining gain when sold.
(b) The Commissioner erred in refusing to treat the gain derived on the sale of Sommers Oil Company stock, including one hundred twenty (120) shares acquired on February 1, 1921, as capital gain, and in refusing to calculate the tax thereon at the rate of twelve and one-half per cent.
There is no evidence to sustain the contention of petitioner*1994 that the stock of the Sommers Oil Company was issued in payment of leaseholds, good will, trackage rights to decedent, E. E. Sommers, or any one else. In the first place, whatever good will Sommers had built up in the oil business was for the Great Western Oil Company, of which he was manager from 1908 to 1920. It was this good will, built up for the Great Western Oil Company by Sommers and his associate employees, Spencer and Bennett, which was a large factor in enabling that company to sell out in 1920 to the Gates Oil Company for $150,000. The evidence shows that of this amount the Great Western Oil Company paid Sommers $20,000, the nature of which payment is shown in our findings of fact. There is no evidence to show that Sommers transferred any good will to the Sommers Oil Company, organized in 1920. The contention *1244 made by petitioner in the instant case is a very similar one to that which was made in , and in denying the validity of such contention in that case, we said:
It may be conceded that the petitioner had built up a considerable clientele and business acquaintanceship, and that this clientele followed*1995 him to a large extent, during his various business enterprises. But this personal following does not constitute good will within the generally accepted meaning of the term.
Another item which petitioner claims constituted an important part of the $75,000, which she seeks to add to the cost basis of the stock owned by decedent in the Sommers Oil Company, is the value of a certain lease owned by decedent of premises of the Neef Brewing Company and trackage rights secured from the Denver & Rio Grande Railroad Company. The evidence establishes that these were transferred by decedent to Sommers Oil Company in 1920 and were used by it in its business and the corporation paid the rent. Whether this transfer was by oral or written assignment is not shown. Whether decedent received anything of value from the corporation in consideration of the transfer, over and above the corporation's agreement to pay the rent, is not shown. If these things had a value greater than the rental which the corporation was to pay for the use of them, that fact is not shown. Certainly there is nothing in the record to show that it had any connection with the issuance of the capital stock of the corporation. *1996 Nothing was set up on the books of the corporation as an asset in the way of good will or leasehold interest or trackage rights.
The evidence shows that the stock was issued for cash to Sommers and the Continental Oil Company, except two or three shares for directors qualifying shares, and of the amount issued from time to time, decedent subscribed for and received 540 shares at a cost of $54,000. This represented his only cost. In 1922 he sold this stock for $142,000. In computing gain or loss upon the sale, the statute says the basis shall be the cost of the property sold. Section 202, Revenue Act of 1921.
Petitioner's contention that $75,000 should be added to the cost of stock acquired by decedent on account of leaseholds, good will, trackage rights, etc., can not be sustained. To arrive at that conclusion, the Board would have to hold that decedent acquired his stock from the corporation at the time of original issue at a cost of about $230 per share, whereas other stockholders acquired theirs at the same time for $100 per share. The record will not sustain any such holding. The cases which counsel for petitioner cites are not in point. They are cases where the*1997 corporation issued its shares for a mixed aggregate of tangibles and intangibles. It is enough to say that we have no such case before us in the present proceeding. *1245 Respondent did not err in the basis which he used for determining the gain on the sale of the decedent's stock in 1922.
The second contention of the petitioner is that the 120 shares of stock issued to decedent February 11, 1921, although not actually held by him for a period of two years, as required by section 206 of the Revenue Act of 1921, should be construed to be within the terms of that section.
The petitioner argues that, in accordance with the agreement made by the decedent and the other stockholders, since all stock subsequently issued should be in proportion to the original issues, a stock right was created and that all stock subsequently issued should be construed to have been issued as of the date of the agreement. The record does not show that any "stock rights" were issued, nor that the corporation was in any way legally bound to issue stock to Sommers. No rights were in existence which were binding on the corporation and accordingly, there was no property which could be made the subject*1998 of sale. The acquisition of stock by the petitioner dates from the time it was actually issued to him. Since the stock which was acquired in February, 1921, had not been held for a period of two years when the sale took place in November, 1922, it is not subject to the provisions of section 206 of the Revenue Act of 1921.
As it appears that the petitioner has paid some of the deficiency since the deficiency notice was issued,
Decision will be entered under Rule 50.