Memorandum Opinion
STERNHAGEN, Judge: The Commissioner determined a deficiency of $1,231,636.92 in 1934 income tax. A distribution in 1934 by Senior Investment Corporation of 43,300 common shares of General Motors Corporation was determined to be a taxable dividend. The facts are stipulated.
[The Facts]
Fred J. Fisher and his wife, Burtha M. Fisher, residents of Detroit, Michigan, filed a 1934 joint federal income tax return at Detroit. Fred J. Fisher died on July 14, 1941. On January 31, 1934, he owned 71,573 Class A shares of Senior Investment Corporation, a Michigan corporation, - all of the shares of that class then outstanding. His cost or basis of the 71,573 Class A shares was not less than $1,723,881.25. On January 31, 1934, without surrendering any of the Class A shares, he received as a distribution on the Class A shares 43,300 common shares of General Motors Corporation having a value of $1,723,881.25.
Senior Investment Corporation was incorporated on July 29, 1929, with 300,000 shares of no par value stock*376 consisting of 100,000 shares each of Class A, B and C stock. The cost to the Fishers and the July 29, 1929, fair market value of the assets, principally securities, transferred by them to Senior Investment Corporation, and the number of shares issued to them therefor by Senior are as follows:
| July 29, 1929 | Number of Senior | ||
| Cost | Fair Market Value | Shares Issued | |
| Fred J. Fisher | $12,957,242.88 | $42,943,427.76 | 71,573 Class A |
| 894,060.02 | 40,000,000.00 | 100,000 Class B | |
| Burtha M. Fisher | 699,350.00 | 5,486,250.00 | 9,143 Class A |
| 10,195 Class C |
In computing its gain or loss from the sale or other disposition of assets received for its shares on incorporation, Senior Investment Corporation used the fair market value of such assets on the date received, as a result of which the corporation had a large operating deficit on January 31, 1934, when the General Motors Corporation shares were distributed to Fisher. If it had used the transferors' cost instead, as was done by the Commissioner, *377 it would have had on January 31, 1934, surplus in excess of $1,723,881.25 available for the distribution of dividends.
Whether, in 1934, Fisher received a taxable dividend measured by the fair market value of the General Motors shares, depends upon whether Senior Investment Corporation had a surplus available for the distribution of dividends, and that in turn depends upon whether the corporation, in computing its gain or loss on sale of assets acquired by it from the Fishers in exchange for its own shares, should have used the fair market value of such assets at the time of the exchange or the transferors' cost. It has been held that the corporation's basis of assets thus acquired is the fair market value when acquired. Senior Investment Corp., 2 T.C. 124">2 T.C. 124, 139; Dorothy Whitney Elmhirst, 41 B.T.A. 348">41 B.T.A. 348; W. S. Farish & Co., 38 B.T.A. 150">38 B.T.A. 150, affirmed 104 Fed. (2d) 833; F. J. Young Corp., 35 B.T.A. 860">35 B.T.A. 860, affirmed 103 Fed. (2d) 137.
The Commissioner relies upon Article 115-1 of Treasury Regulations 86 under *378 the 1934 Act, and later regulations containing similar provisions, and Section 501 of the second Revenue Act of 1940, amending Section 115 so as to provide that the basis to be used for earnings and profits is the substituted basis used for income tax purposes. However, Section 501(c) provides that the amendment was not to be applied in any case pending on September 20, 1940, as this case was. In view of Section 501(c), this decision is not controlled by the Revenue Act of 1940, but by the above decisions. It follows that the distribution of the 43,300 shares of common stock of General Motors Corporation to Fisher in 1934 was not a taxable dividend to him.
Decision will be entered under Rule 50.