*3232 1. The value of shares of stock received in part payment for the sale of property in 1920 determined.
2. The Commissioner's affirmative claim that he erred in his determination that petitioner was taxable as a trust and that he should have taxed him as a corporation, is not sustained by the evidence.
*540 In this proceeding the petitioner seeks a redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $48,002.92, proposed against it by the respondent in a deficiency notice mailed under date of February 9, 1926. The petition in this proceeding was filed April 22, 1926. Information having been received by the respondent that the petitioner was in process of liquidation, a jeopardy assessment of the proposed deficiency was made in accordance with section 279 of the Revenue Act of 1926, on April 22, 1926.
The deficiency in question resulted from increasing the profit on the sale of assets by increasing from $9,000 to $90,000, the market value of*3233 900 shares of stock of the Western Producing & Drilling Co. received as part payment. The original petition alleges two errors, but taken together it is apparent that they comprise only one issue, namely, whether the respondent erred in his determination of the market value of the shares of stock of the Western Producing & Drilling Co. At the hearing of this proceeding the original petition was amended to assign as an additional error that regardless of the value of the stock when received in 1920 the stock was determined to be worthless as of December 31, 1920, and should be allowed as a loss in 1920. At the hearing respondent was permitted to amend his answer to claim an increased deficiency based upon allegations that the petitioner was an association taxable as a corporation under the Revenue Act of 1918 rather than as a trust under section 219 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is a dissolved Arkansas common law trust which had its principal office at Paragould. It was organized September 29, 1919. Prior thereto certain oil acreage in Texas had been owned by approximately 25 individuals. These individuals organized the petitioner for the purpose*3234 of operating said acreage. They *541 talked over the form of the organization and then sent an attorney, together with two of their own number, to Texas to investigate the form of organization used by similar companies in Texas. It was found that the most of the Texas companies used what was called a common law trust, the organization of which was authorized by the State of Texas. A meeting of the individuals interested was held and B. M. Kitchens and S. P. McHamey were elected trustees. Thereupon, said owners executed deeds for the oil acreage to the trustees and concurrently therewith the two trustees executed a written common law trust declaration similar to the form commonly in use in Texas.
The capitalization of the petitioner was $110,000, of which written certificates of beneficial interest in the amount of $65,000 were issued to the prior owners of the oil acreage. Certificates for the remaining $45,000 were issued and sold to the public for cash. Petitioner had about 350 stockholders, of whom about 75 lived in or near Paragould, Ark., and the remainder were scattered over southeastern Missouri and northwestern Arkansas.
After its organization and in the*3235 early part of 1920, the petitioner was engaged in the oil business. In addition to selling its stock above referred to it drilled three wells on the oil acreage which it had acquired. In February, 1920, it brought in its first well, which was an especially good one, and the company immediately began the drilling of two additional wells. At that time the company received a number of offers for the sale of their oil leases. The two wells subsequently drilled proved to be failures and the trustees of the petitioner about June, 1920, attempted to dispose of their property through brokers in Wichita Falls, Tex. One G. E. Kadane became interested in the property and in June, 1920, came to Paragould to complete negotiations for its purchase. The negotiations culminated in the execution of a contract of sale dated June 18, 1920, by which the oil acreage above referred to was sold and assigned for the price of $24,000 in cash, 900 shares of stock of the Western Producing & Drilling Co., a Delaware corporation with authority to do business in Texas, and notes of the par and actual value of $96,000. The contract provided a period of approximately 30 days for closing and was finally closed*3236 on July 15, 1920, by the delivery of the deed to the property and the payment of the consideration named.
At the time of the negotiations looking to the sale of the property Kadane claimed that he had authority to act for a party by the name of W. B. Munson in the execution of the purchase. Certain holders of beneficial interest of the petitioner objected to receiving stock of the Western Producing & Drilling Co. as part payment of the purchase price. In order to overcome the objections of these part owners *542 in the property Kadane proposed to and did insert in the contract of sale a paragraph reading as follows:
It is further contracted and agreed that first parties have the option at the expiration of six months from date hereof to call upon second parties to redeem all or any part of said shares of stock of said Western Producing & Drilling Company at the above stated value thereof; and upon the exercise of this option by written request made by first parties or either of them at the end of such period or within three months thereafter, second parties contract to redeem said shares of stock at the above stated value to the extent the same may be offered for redemption. *3237 So long as said stock or any part thereof may be held by first parties or their assigns, but not exceeding the period of one year from this date, second parties undertake and guarantee that said stock shall pay quarterly dividends of not less than two per centum per month on the stated value of said stock. Second parties further contract and agree to reissue said stock at any time in such shares and fractional parts of shares and in the names of such individuals as may be designated by first parties.
The contracts of sale purported to be with G. E. Kadane and W. B. Munson as parties of the second part. Kadane signed Munson's name thereto. Munson, having learned that Kadane was exceeding his authority in making any guaranty with respect to dividends to be paid on the stock of the Western Producing & Drilling Co., and with respect to the redemption of that stock, telegraphed on June 30, 1920, to B. M. Kitchens, trustee, Par-A-Tex Oil Co., Paragould, Ark., as follows:
Kadane only authorized to purchase Paratex and Burk Sheffield property [an adjoining property] for use and benefit Western Producing & Drilling Co. and not authorized to bind me personally by contract or other*3238 obligation Western Producing & Drilling Co. responsible and able to carry out contract made in their behalf.
At the time of closing the contract on July 15, the petitioner's representative, B. M. Kitchens, did not see Munson personally but was informed by Kadane to the effect that Munson was out of it and that if petitioner intended to hold Munson to the above quoted portion of the contract the trade was off. The trustees of the petitioner believed, however, that the cash consideration and the notes constituted a fair price for the property even though the stock might prove to have no value, and therefore went ahead and closed the deal. The deed to the property was made directly to Munson and Kadane, who later transferred it to the Western Producing & Drilling Co., which about three weeks later transferred it to the American Refining Co., which company had guaranteed the $96,000 notes of the Western Producing & Drilling Co.
The Western Producing & Drilling Co. had been organized early in 1920 with a capital stock of $2,000,000 to take over the assets of the Western Drilling Co. Its assets at the time the petitioner received *543 900 shares of its stock included six*3239 or seven drill rigs, a lot of wild cat acreage, and one small well in the town of Burk-Burnett. About July 15, 1920, Kitchens, acting for the petitioner, made efforts to dispose of the 900 shares of stock acquired in the deal but was unable to find a purchaser. Persons conversant with the affairs of the Western Producing & Drilling Co. stated that they would not give $10 a share for the stock. In the latter part of December, 1920, Kitchens made further efforts to dispose of the 900 shares of the stock owned by the petitioner but could find no buyer at any price.
In October, 1920, the petitioner wrote to Munson requesting him to make good the guarenty stated in the sale contract that dividends should be paid upon the stock of the Western Producing & Drilling Co. at the rate of 2 per cent per month and Munson replied that at the time the contract was carried into effect it was well understood by the trustees that Munson was not bound by the terms of the contract with respect to the payment of dividends on the stock and the redemption of the stock. No dividends were ever paid upon the stock. It had been ascertained by the trustees of the petitioner at the date of the execution*3240 of the contract that Kadane's financial responsibility was practically nil. Within six months from the date of sale the trustees of the petitioner demanded of Kadane and Munson that they redeem the stock of the Western Producing & Drilling Co. at the agreed price of $90,000. This they refused to do.
In January, 1921, petitioner through its trustees brought suit against Kadane and Munson in the District Court of the United States for the Wichita Falls Division of the Northern District of Texas to enforce their liability under the contract of sale. This suit was finally compromised in 1921 by Munson paying to the petitioner the sum of $30,000. Under the settlement Kadane, Munson and the Western Producing & Drilling Co. were absolved from further liability under the contract and the 900 shares of the Western Producing & Drilling Co. were turned over to Kadane and Munson. The petitioner accounted for the income from this source in its return for the year 1921.
The petitioner filed an income-tax return for 1920 as a corporation on Form 1120. Subsequently it filed an amended return as a fiduciary on Form 1041, the date of filing not being in evidence but the date upon which it*3241 was executed was September 8, 1921. The respondent held that the petitioner was taxable as a trust under section 219 of the Revenue Act of 1918 for the calendar year 1920, which ruling had not been reversed at the time the petitioner distributed its assets. No question was ever raised as to the petitioner being a trust entitled to be taxed under section 219 prior to the hearing of this proceeding.
*544 OPINION.
SMITH: Although the petition in this proceeding was not filed with the Board within 60 days from the date of the mailing of the deficiency notice, the Board has jurisdiction under section 283(g) of the Revenue Act of 1926.
The deficiency determined by the respondent against the petitioner for the calendar year 1920 results solely from increasing the fair market value of 900 shares of the Western Producing & Drilling Co. received in part payment for the sale of property from $9,000 to $90,000. It is the contention of the respondent that the shares of stock received had a value of $90,000 and that the evidence does not prove the contrary. We think, however, that the evidence does prove the contrary. At the time that the contract of sale was carried out the*3242 trustees of the petitioner had been advised by Munson that he would not be bound by the agreement to pay dividends upon the 900 shares of stock of the Western Producing & Drilling Co. and to redeem it at its par value, and it was known that Kadane was not financially responsible. The evidence all goes to show that the realizable value of the stock at the date of its receipt by the petitioner was not in excess of $10 per share, the amount at which it was returned by the petitioner in making its income and profits-tax return for 1920. This issue must, therefore, be decided in favor of the petitioner.
The respondent contends that the petitioner should be held to be liable to income tax as an association for the year 1920 and that it erred in taxing it as a trust under section 219 of the Revenue Act of 1918.
The burden of proving that the petitioner is taxable as an association rather than as a trust rests upon the respondent. We have not before us the declaration of trust or much evidence as to how it conducted its operations. Section 704(a) of the Revenue Act of 1928 provides:
If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such*3243 taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (1) under the regulations in force at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, 1921, or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer's existence.
The respondent contends that this provision of law is not applicable to the petitioner, since the original return filed was on Form 1120; that the petitioner can not claim that it "filed a return *545 as a trust" for the taxable year 1920; that the Board has repeatedly held that a taxpayer's original return is the statutory return and that there is no authority for the making or accepting of an amended return. *3244 ; ; . We think, however, that the language of section 704(a) is broad enough to cover the case of this petitioner. The respondent accepted the second return in substitution for the first return and has determined tax liability of the petitioner upon the theory that it was a trust.
Judgment of no deficiency will be entered for the petitioner.