*1645 1. Where a corporation having only common stock sold all of its assets to a new corporation for all of its common stock and half of its preferred and the remaining half of the preferred was later sold to the public, the preferred stock being 7 per cent cumulative and having priority over common stock in event of sale or dissolution, a stockholder of the second corporation, to whom the stock was distributed, received something "really different from what he theretofore had" and taxable gain resulted at that time. Marr v. United States,268 U.S. 536">268 U.S. 536.
2. In such a situation the value at date of the formation of the new corporation and not the March 1, 1913, value of the stock of the predecessor corporation is the proper basis for determining gain realized on a sale of shares in 1923.
*406 These proceedings were brought to redetermine deficiencies in income tax of the petitioners for the year 1923 in the following amounts:
| Petitioner | Docket No. | Amount |
| Charles T. Kountze | 37323 | $14,843.40 |
| Frederick H. Davis | 37324 | 17,919.11 |
| Walter B. Roberts | 37534 | 2,640.72 |
| Charles T. Kountze and Alice A. Kountze, | 37535 | 15,535.40 |
| Alice A. Kountze, Executors, Estate of Luther | ||
| L. Kountze, Deceased | ||
| Willis Todd | 37536 | 3,576.59 |
| Thomas L. Davis | 37395 | 4,773.19 |
*1646 The issue common to all cases is the proper basis for computing the profit arising from the sales in 1923 of common stock of the Union Power and Light Company. Petitioners contend that the stock should be valued as of September 12, 1917, the date of the reorganization of the Union Company and the formation of the Union Power and Light Company. Respondent insists on a valuation as of March 1, 1913, and ignores the reorganization. In the event the date of reorganization is used as a base there is presented the further question of the fair market value as of that date. The petitioners further assert that, if the March 1, 1913, value of such stock be the correct basis for determining their profits, the respondent erred in fixing that value at $40 per share.
In Docket Nos. 37323 and 37395 the petitioners further allege that the respondent erred in determining that the loss of a $5,000 investment made by each petitioner in the stock of the Dort Sales Company, held by the petitioners for more than two years prior to sustaining such loss, was not a capital loss.
Upon proper motion the above-named appeals were consolidated for hearing and report.
*407 FINDINGS OF FACT.
*1647 The Union Company of Omaha, hereinafter known as the Union Company, was incorporated in 1908 under the laws of Nebraska for the purpose of owning and holding the stock of, and managing and operating, subsidiary companies engaged in the manufacture and sale of gas and of electric light and power and in the sale of electric appliances. The original capital stock was 200 shares, all common, of the par value of $100 per share. In August, 1911, the issue was increased to $500,000 and on May 21, 1917, to $1,000,000. Additional stock certificates were not issued but in May, 1917, the company increased its capital stock account on its books to $903,000. On March 1, 1913, the Union Company had outstanding 4,046 shares of common stock of the par value of $100 per share. The stock was owned by Frederick H. Davis, its principal stockholder and owner of 1,288 shares; his son, Thomas L. Davis, holding 429 shares; Charles T. Kountze and Luther L. Kountze, each owning 858 shares; and Willis Todd and Walter B. Roberts, possessing 300 and 313 shares, respectively. Todd acquired his stock on December 12, 1912, at $40 per share. The purchase was made on the basis of par, the difference between*1648 $100 and $40 per share representing a salary compensation which the Union Company felt unable to pay at that time. Roberts was the son-in-law of Frederick H. Davis and was related to Charles Kountze and Luther L. Kountze by marriage. In January, 1916, he abandoned his own business and became the secretary and treasurer of the Union Company. In May of that year he acquired 313 shares of capital stock of that corporation at $40 per share because of his close family relationship to the other stockholders.
Prior to 1911 the Union Company had acquired practically all of the capital stock of the Columbus Light, Heat and Power Company of Aberdeen, S. Dak., and on March 1, 1913, owned approximately 91 per cent of such stock. The individual stockholders of the Union Company acquired the capital stock of the several subsidiaries and exchanged it for stock of the Union Company in the ratio of two shares of the subsidiary corporation for one of the Union Company.
In 1913 the Union Company acquired the capital stock of the North Platte Light and Power Company of North Platte, Nebr., and in 1914 it purchased the electric plant of the town of Chariton, Iowa, and the stock of the Osceola*1649 Light and Power Company of Osceola, Iowa. These latter companies were merged into the Southern Iowa Gas and Electric Company, whose capital stock the Union Company owned. In May, 1917, the Union Company acquired the plants of Watertown and Yankton, S. Dak., and combined them into a corporation *408 called Eastern Dakota Electric Light and Power Company, all of whose capital stock the Union Company held.
In September, 1917, Frederick H. Davis, Charles T. Kountze, Luther L. Kountze, Willis Todd, Thomas L. Davis and Walter B. Roberts organized and incorporated the Union Power and Light Company under the laws of Nebraska, with an authorized capital stock of $1,000,000 in common and $1,000,000 in preferred stock, each having the par value of $100 per share. On September 12, 1917, the Union Company sold all of its assets, being the capital stock of its several subsidiary companies, to the Union Power and Light Company, for the entire issue of $1,000,000 of common stock and $250,000 of preferred stock and thereupon distributed the 10,000 shares of common and 2,500 shares of preferred stock to its stockholders in the same proportion as they had owned the common stock of the Union*1650 Company. The Union Company thereupon was dissolved. The Union Power and Light Company sold an additional 2,500 shares of preferred at par ( $100) to the public at large and such shares were held by residents of Nebraska, Iowa and other adjoining States.
On September 12, 1917, the common stock of the Union Power and Light Company was held as follows:
| Shares | |
| Frederick H. Davis | 3,184 |
| Charles T. Kountze | 2,120 |
| Luther L. Kountze | 2,120 |
| Thomas L. Davis | 1,060 |
| Walter B. Roberts | 774 |
| Willis Todd | 742 |
| 10,000 |
The preferred stock of the Union Light and Power Company paid a cumulative dividend of 7 per cent and was preferred as to participation in the assets of the corporation upon dissolution or sale.
On October 10, 1923, all of the stockholders of the Union Power and Light Company entered into an agreement to sell to Albert Emanuel Company, Inc., of New York all of its common stock, or 10,000 shares, for $1,450,000 and also to sell all preferred stock owned by such stockholders at par plus accrued dividends, under certain conditions therein set forth. In November or December, 1923, the several stockholders of the Union Power and Light Company completed*1651 the sales of such stock, receiving therefor in the aggregate $975,000 in cash, less $70,326.24 reserved for incidental expenses, and $250,000 in bonds and $225,000 in the preferred stock of the Northwestern Public Service Corporation, which had been organized to take over the properties so sold. The said stockholders also sold *409 to the Emanuel Company 575 shares of the preferred stock of the Union Power and Light Company according to the terms of their contract. The petitioners reported in their income-tax returns for 1923 a profit based on the difference between the March 1, 1913, value of the Union Company stock, fixed by them at $100 per share, and the sale price received in December, 1923. The respondent based his deficiency notices on a March 1, 1913, value of $40 per share for such stock. Neither in the returns nor in the notices of deficiencies was the date of reorganization used as a basis.
The fair market value of the common stock of the Union Power and Light Company on September 12, 1917, was $125 per share.
OPINION.
VAN FOSSAN: The issue in Docket Nos. 37323 and 37395 relating to a loss of $5,000 invested in stock of the Dort Sales Company was not*1652 presented at the hearing or supported by any evidence. Counsel for the petitioners asserts in his brief that the sole issue in the cases is the value of corporate stock as the basis of determining profit. Therefore, we assume that the former issue has been abandoned and affirm respondent's determination as to it.
The petitioners present two phases of their allegation of the respondent's errors:
(1) That the basis adopted by them in their returns and by respondent in his notices of deficiency was erroneous and that the proper basis for computing the profit derived from the sale of the common stock of the Union Power and Light Company to the Albert Emanuel Company, Inc., is the value of that stock on September 12, 1917, the date of the reorganization, which value, it is claimed, was at least $130 per share, and
(2) If it be determined that the March 1, 1913, value of the capital stock of the Union Company is the correct basis for such computation, the value of that stock was at least $100 per share on that date.
The evidence of value introduced by petitioners is so convincing as to leave us practically only a question of law as to the basis for determining gain. Petitioners' *1653 witnesses were men of high standing and eminent qualifications and their testimony stands uncontradicted.
Passing to the question of law, the petitioners contend that the capital stock of the Union Power and Light Company acquired by them on September 12, 1917, was essentially different in character and worth from the stock of the Union Company held by them before the reorganization. They assert that the situation is governed by the decision of the United States Supreme Court in . The respondent maintains that the *410 stockholders of the Union Company possessed the same shares of interest in the assets and business of the enterprise after the reorganization as they did before, and that , is controlling.
In the cases at bar the Union Company, on September 12, 1917, sold all of its assets to the Union Power and Light Company for 10,000 shares of the common and 2,500 shares of the preferred stock of the latter company and distributed the stock thus received to its own stockholders in the same proportion as they had held its stock. Twenty-five hundred shares of the*1654 preferred stock of the Union Light and Power Company were set aside simultaneously for sale to the public at par and later were sold. The preferred stock of the Union Power and Light Company was charged with the payment of a cumulative dividend of 7 per cent and also was preferred in the distribution of the corporation's assets upon their sale or other disposition or upon the dissolution of the company. The outstanding 5,000 shares of preferred stock, therefore, imposed the burden of an annual dividend charge of $35,000 on the profits of the Union Power and Light Company. All of the stock of the Union Company was common stock.
In the Marr case, prior to March 1, 1913, Marr and his wife owned 339 shares of the preferred and 425 shares of the common stock of the General Motors Company of New Jersey. In 1916 they received in exchange for this stock 451 shares of the preferred and 2,125 of the common stock of the General Motors Corporation of Delaware. The New Jersey corporation had outstanding $15,000,000 of 7 per cent preferred stock and $15,000,000 of common stock, all shares having a par value of $100. The Delaware corporation had an authorized capital of $20,000,000 in*1655 6 per cent nonvoting preferred stock and $82,000,000 in common stock, all shares likewise having a par value of $100. Only 750,000 shares of the common stock of the Delaware corporation were issued in exchange for the common stock of the New Jersey corporation, the remaining shares being held for subsequent sale. The difference between the cost to the Marrs of their stock in the New Jersey corporation and the value of their stock in the Delaware corporation was held to be taxable gain. The court ruled that the Delaware corporation was essentially different from the New Jersey corporation; that a 6 per cent nonvoting preferred stock was essentially a different security from a 7 per cent voting preferred stock; and that a common stock subject to the priority of $20,000,000 preferred stock and a $1,200,000 annual dividend charge was essentially different from a common stock subject only to the priority of $15,000,000 preferred stock and a $1,050,000 annual dividend charge.
*411 In Weiss v. Stearn, the owners of the entire capital stock ($5,000,000) of the National Acme Manufacturing Company, an Ohio corporation, delivered their certificates of stock to the Cleveland*1656 Trust Company as depositary. Eastman, Dillon and Company also deposited there $7,500,000 in cash. A new corporation, the National Acme Company, was thereupon incorporated under the laws of Ohio, with $25,000,000 capital stock and powers similar to those of the old corporation. The National Acme Company then purchased the entire assets and assumed all liabilities of the old corporation in exchange for its entire capital stock issued to the depositary. The National Acme Manufacturing Company thereupon was dissolved. The depositary delivered to the stockholders the $7,500,000 in cash and certificates for $12,500,000 in stock, and to Eastman, Dillon and Company certificates for the remaining $12,500,000 in stock. It was held that each stockholder retained one-half of his interest in the corporation and disposed of the other half for cash. In the Weiss case it was further held that the proportional interest of each stockholder was the same in both corporations, there having been no change in the character of the securities issued and that no gain was derived. The court said: "Something more is necessary, - something which gives the stockholder a thing really different from what*1657 he theretofore had."
Under the principles established by the above cases, a new basis for computing gain or loss was established in the year 1917 when petitioners exchanged their proportionate stock interests in the Union Company for stock interests in the Union Power and Light Company. Before the reorganization the petitioners owned only common stock in the Union Company. After the reorganization they owned certain shares of common stock subject to the priority of $500,000 preferred stock, enjoying the preference of a 7 per cent cumulative dividend and also precedence in the distribution of the corporation's assets upon their sale or upon the dissolution of the corporation. They also owned certain shares of the preferred stock, but not all of them. Twenty-five hundred shares of such stock were owned by numerous stockholders residing in Nebraska, Iowa and neighboring States. These differences in stock classes and priorities and the ownership of such stock by strangers to the original stockholders of the Union Company constituted such a divergence of interest as to have an important bearing on the rights and, hence, the value of the common stock owned by the petitioners. We*1658 conclude that the interests of the petitioners in the Union Company were essentially different from those held by them in the Union Light and Power Company. See ;; ; *412 ; , affirming, in effect, .
The gain derived from the sale of the Union Light and Power Company stock to the Albert Emanuel Company, Inc., in 1923 should be measured by the difference between the value of that stock on September 12, 1917, as found by us, and its sale price in 1923.
Reviewed by the Board.
Judgment will be entered under Rule 50.