*2902 Respondent's determination of the amount of petitioner's income from a partnership approved.
*808 This proceeding results from respondent's determination of deficiencies in income taxes of $10.28 for 1920 and $4,268.24 for 1921. The petition alleges that respondent erroneously increased petitioner's income for 1921 by $21,580, representing the balance of his proportionate share of the income of a partnership, of which he was a member, as shown by its return. No question is raised by petitioner as to the correctness of respondent's determination for the year 1920.
FINDINGS OF FACT.
The petitioner, a resident of Coffeyville, Kans., was, together with George I. Bumbaugh, J. C. Clover, and H. J. Culbertson, equally interested in a partnership known as the State Line Gas Co. Prior to the close of the calendar year 1920 this company had drilled certain gas wells, laid pipe lines, and piped gas into Coffeyville, Kans.
*809 On December 31, 1920, the State Line Gas Co. entered into a contract of sale whereby it sold "its entire business interests, *2903 real and personal," jointly to the Elbukan Oil Co. of Eldorado, Kans., a corporation existing under the laws of the State of Delaware, and the M.T.C. Oil & Gas Co. of Waggoner, Okla., another Delaware corporation, for a consideration of $200,000. With the sale of its business and assets the partnership was dissolved and the four partners each looked after their one-fourth interest to be received from the proceeds of the sale. Payment of the purchase price was provided for in the agreement as follows:
1. Fifty Thousand ($50,000) Dollars cash to be placed in escrow in Producers State Bank, Tulsa, Oklahoma, pending the examination of the titles of the said estate of the said first party and the examination of the actual physical property itself, by the said second party or its attorney. At the completion of such examination and the approval thereof on the part of second party, such party will tender the last named cash sum unto said first party. It is mutually agreed that the examination of the physical property will be completed within Five (5) days of this date, and that such examination of abstracts, assignments and other instruments of title and transfer shall not exceed Ten*2904 (10) days, dating from receipt thereof by said second party. The balance of the $150,000.00 is to be paid within ninety (90) days from the date hereof, in cash and gas as follows: $5000.00 to be paid monthly, and all gas received from January 1, 1921 shall be retained by first party until final payment in cash shall have been made; the money which said first party shall have received as above described, shall be deducted from the said unpaid balance of the $150,000.00.
All assignments of title and evidence of transfer are to be placed in escrow in Producers State Bank, Tulsa, Oklahoma, by said first party and there to remain until final installment of payment is paid first party by second party, and then to be turned over to said second party. Copies of all such instruments of conveyance are to be mailed by said first party, to the attorney of second party, Fred Robertson, Federal Building, Kansas City, Kansas, together with all abstracts of title.
It is mutually agreed and understood by said parties hereto, that in the event of the failure on the part of said second party to pay the balance of the entire purchase price as above set out, and in the manner and within the time*2905 hereinbefore specified, party of the first part will grant further necessary time for the performance of these conditions of payment, and in consideration of such extension of time of completing payments, second party hereby agrees to pay unto said first party, a penalty of 2% per month, payable monthly on any, and all unpaid balance, until all penalties and unpaid balance is paid in full, and until the said $200,000.00 shall be paid in full.
It is understood and agreed that final payment shall be made in full within six months from the date hereof.
It is mutually understood and agreed by said parties hereto, that first party hereto shall retain title to property herein described until final payment shall have been made, but that said second parties shall operate and develop said property at its own expense, and shall assume all responsibility connected therewith, beginning as of date of January 1, 1921, and are to receive credit on purchase price for all benefits derived from said property, from said date of January 1, 1921.
*810 It is understood and mutually agreed by the parties hereto, that the properties purchased under this agreement shall be the sole and only*2906 security for any and all deferred payments hereunder.
The Elbukan Oil Co. and the M.T.C. Oil & Gas Co. were unable to completely discharge their obligations under the above agreement and on November 10, 1921, there was a balance of $59,740, due three of the partners. Clover had previously collected his one-fourth interest, amounting to $36,336.39, in cash.
On November 10, 1921, the M.T.C. Oil & Gas Co. entered into an agreement with either Bumbaugh or Culbertson, which included as a portion thereof the prior agreement entered into on December 31, 1920, and provided as follows:
* * *
AND WHEREAS, such sale was thereafter effected and proper assignments covering same were deposited in escrow with the Producers State Bank of Tulsa, under date of April, 9th. 1921;
AND WHEREAS there is still due the second parties, as follows:
| H. J. Culbertson | $16,580.00 |
| E. F. Huffman | 21,580.00 |
| George I. Bumbaugh | 21,580.00 |
AND WHEREAS the said first party desires that such assignments be now delivered to it by said bank.
NOW THEREFORE, in consideration of the delivery of such assignments, it is agreed as follows:
1. That said first party will issue 59,740 shares*2907 of its capital stock unto said second parties in amounts to each as mentioned above, said stock to be issued as soon as possible.
2. That said first party will and does hereby agree to pay monthly unto said second parties on the stock so issued, a return equal to the two percent (2%) penalty provided for in the original contract of sale - the dividends on said stock to apply on this two percent monthly payment.
3. The said first party shall at any time have the right to purchase or redeem the stock issued as above provided or any part thereof, and penalty thereafter shall only be figured on the unredeemed portion of such stock.
4. It is further provided Mr. Culbertson shall be paid five thousand dollars on or before December, 5th, 1921, upon surrender of $5,000.00 of the stock to be issued as herein provided.
5. It is further provided that any of the said second parties, or all of them, may demand the redemption of any part or all of the stock herein mentioned at any time after January 1, 1922, by giving the said first party at least sixty days written notice.
6. As security for the performance of the above agreements, the said first party undertakes for itself*2908 and THE ELBUKAN OIL COMPANY, to issue assignments covering all the property covered in the assignments to be this day delivered to it - such assignments to be drawn to second parties hereto, and to deposit such assignments in escrow with the Producers State Bank, of Tulsa, to be held by said bank, pending the fulfillment of the obligations herein contained. The said first party shall have a reasonable time, not to *811 exceed ten days, for the execution and deposit of the assignments herein mentioned.
This action by Bumbaugh and Culbertson was not authorized by petitioner as far as his share in the balance due was concerned, but he acted upon the terms of the agreement and accepted the 21,580 shares of the M.T.C. Company's stock, which was received about a week or 10 days subsequent to the date of the agreement. At that time petitioner believed the stock to be worth its par value, $1 per share, as he had been assured by the officers of the company that the stock was worth its face value.
After receiving the stock, petitioner attempted to put it up as collateral for a loan with one of the banks in Coffeyville, but it was refused. He interviewed the president of the M. *2909 T.C. Company but that company was unable to redeem its stock. He attempted to sell the stock on various occasions but was unable to dispose of it. Thereafter he called upon Fred Robertson, the attorney named in the agreement of December 31, 1920, and requested him to protect his, Huffman's, interest and save him from sustaining a heavy loss. Robertson secured a written agreement under date of October 11, 1922, from the M.T.C. Oil & Gas Co. and the Elbukan Oil Co. that the assignments mentioned in the agreement of November 10, 1921, should be immediately executed and deposited in escrow with the American State Bank at Coffeyville, that the companies would pay the balance due on or before January 15, 1923, and that upon failure to pay the bank should deliver the assignments over to Culbertson, Huffman, and Bumbaugh.
Prior to January 15, 1923, the oil companies went into the hands of receivers, and petitioner filed a claim under the agreement of October 11, 1922, against the assets of these companies held by the receivers. In 1924 Huffman made a settlement with the receivers, surrendered his 21,580 shares of stock, and received approximately $19,000 in liquidation of his claim.
*2910 The M.T.C. Oil & Gas Co. and the Elbukan Oil Co. were each capitalized for $5,000,000, par value $1 per share. By December 31, 1921, about $1,600,000 of stock in each company had been sold. The stock was disposed of by a "high pressure" stock selling concern in Milwaukee, Wis., which company received 25 to 40 per cent of the proceeds for making the sales. Attractive representations of future yields were made by this company to prospective purchasers because of expected oil discoveries and a special "booster train" was operated from Wisconsin to Kansas and Oklahoma to push the stock company's sales. In 1921 dividends of 1 per cent a month were paid on the stock.
*812 The partnership return of the State Line Gas Co. for 1921 was filed by Clover. This return showed a net income for the partnership of $145,345.36 and the one-fourth interest of each partner with a parenthetical explanation showing cash or cash and stock as the distributive shares of each of the partners. The return shows that Huffman's share was cash in the amount of $14,756.39 and stock in the amount of $21,580. Petitioner admits the receipt of the cash and the stock during 1921. No distribution other*2911 than the stock and cash hereinbefore mentioned was received by petitioner during the year as a result of the sale of the partnership assets.
In making his return for 1921 Huffman included the cash received but did not include the stock. Respondent increased petitioner's net income by $21,580 representing the par value of the M.T.C. Oil & Gas Co. stock received during 1921.
OPINION.
MORRIS: The question we are asked to determine in this proceeding, namely, whether petitioner's net income for 1921 should be increased by $21,580, the balance of his proportionate share of the partnership income as shown by its return, was presented in the case of , and the facts in support of the petitioner's contention are almost identical. The partnership return shows a net income to be accounted for by the members of $145,345.46 and the petitioner's share as cash $14,756.39 and stock $21,580. He returned the cash for the taxable year but did not report any additional amount as income from the partnership. Based on the partnership return alone, there is no question but that the petitioner was in error.
Section 218(a) of the Revenue Act*2912 of 1921 provides:
That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, * * *
The petitioner's distributive share of the partnership income as shown by its return was $36,336.39, all of which, under the above provision of the Act, should have been reported in his personal return.
The petitioner contends, however, that the stock, representing part of his distributive share as shown by the partnership return, was not income, because it was practically worthless on December 31, 1921. The record shows that as soon as the partnership consummated the sale of its assets, it dissolved, leaving the partners to collect the balance *813 of the purchase price as best they could. One of the partners collected all of his proportionate share in cash in 1921, while one of the others collected $5,000 more than the remaining two. Under the contract of sale all assignments of title and evidence of transfer were placed in escrow in the Producers*2913 State Bank of Tulsa, Okla. The petitioner testified that they were full security for and worth his claim of $21,580 against the purchaser. Under the agreement of November 10, 1921, the petitioner surrendered his claim and accepted in lieu thereof 21,580 shares of the M.T.C. Company's stock, which at that time he believed to be worth its par value of $1 per share. The petitioner contends that the fair market value of the stock on December 31, 1921, was 5 cents a share, or that it had a "net" value of 60 or 70 cents a share provided 35 or 40 cents a share had been paid to "high-powered salesmen" to sell it. The valuation of 5 cents a share is based on the testimony of one of the witnesses, who, however, on cross-examination testified that on December 31, 1921, the stock was probably worth par and that his valuation of 5 cents a share testified to on direct examination was based on subsequent developments rather than the facts as they existed at that time. As a matter of fact the witness himself had acquired some of the stock at par, part of it in payment of a debt and the balance for cash. One million six hundred thousand shares of the stock were sold on the market at par and during*2914 1921 dividends of 1 per cent per month were paid on it. There is no evidence of any sales of the stock at less than par. The issuing corporation took over valuable leases, gas wells, and pipe lines from the partnership. There is nothing to indicate that the value of those assets together with the other assets owned by it were not equal to the par value of the stock.
In connection with the petitioner's contention for a "net" value of 60 or 70 cents a share, we held in the Bumbaugh case, supra, that the expenditure of large sums of money for promotion and advertising purposes does not, in and of itself, prove that the par value of the stock received by the petitioner should be discounted 60 or 70 per cent.
In our opinion the preponderance of the evidence does not support the petitioner's contention, whether it be considered that the partnership had a debt against the purchasing corporations for the balance of the purchase price or stock of one of them, which was distributed to its members upon dissolution, nor was sufficient evidence introduced to warrant a different conclusion than that reached in our prior decision on the same transaction.
Judgment will be entered*2915 for the respondent.