1949 U.S. Tax Ct. LEXIS 236">*236 Decision will be entered under Rule 50.
On the record, held, that the transaction in 1936, whereby certain properties were exchanged for all of petitioner's capital stock and the assumption of certain liabilities, constituted a nontaxable exchange under section 112 (b) (5) of the Revenue Act of 1936, as amended. Under section 113 (a) (8) of the Internal Revenue Code, the petitioner's basis in the assets acquired is cost of the assets to the transferors.
12 T.C. 507">*507 This proceeding involves income, declared value excess profits, and excess profits tax deficiencies as follows:
| Fiscal year ended -- | Tax | Deficiency |
| Income tax | $ 8,445.30 | |
| Sept. 30, 1941 | Declared value excess profits tax | 367.07 |
| Excess profits tax | 7,114.76 | |
| Sept. 30, 1942 | Excess profits tax | 21,448.84 |
1949 U.S. Tax Ct. LEXIS 236">*237 The contested issue is whether the respondent erred in treating the exchange in 1936 of petitioner's stock for property as a nontaxable transaction under section 112 (b) (5) of the Revenue Act of 1936, as amended.
There is an alternative issue, relating to the proper rate of depreciation on petitioner's citrus groves. This issue, however, becomes moot in the event the primary issue is decided for respondent.
12 T.C. 507">*508 The case was submitted upon oral testimony and exhibits.
FINDINGS OF FACT.
Petitioner is a Florida corporation having its principle place of business at Winter Garden, Florida. Its income and excess profits tax returns for the fiscal years involved were filed with the collector of internal revenue for the district of Florida, at Jacksonville, Florida.
L. W. Tilden and Jennie May Tilden were husband and wife and were the parents of nine children: Clarence G. Tilden, L. W. Tilden, II, Harold C. Tilden, Gladys Mae Hudnall (sometimes referred to as Gladys Mae Robinson), Robert W. Tilden, Frederick T. Tilden, Grace Margaret Starke, Doris Tilden Davis, and Virginia Tilden Holtzclaw. Virginia was the youngest, and reached her majority during 1936.
For a number of years prior1949 U.S. Tax Ct. LEXIS 236">*238 to 1930, L. W. Tilden owned and operated citrus groves and truck farm land near Winter Garden, Florida. In the early part of 1930 he owed approximately $ 280,000, part of which was secured by real estate mortgages. On March 31, 1930, L. W. Tilden entered into an arrangement whereby extensions for the payment of this indebtedness were granted by several creditors in consideration of Tilden's giving a blanket mortgage on his properties to three trustees. This mortgage vested the trustees with broad authority to operate the properties. The profits were to be first applied to retire current interest charges, and then to liquidate the obligations due participating creditors. By choosing to participate, secured creditors agreed to abstain from foreclosure during the pendency of the trusteeship, but the priority of their liens was not impaired. Thereafter the trustees employed Tilden to operate the properties under a written agreement providing for a salary to him of $ 500 per month, and also providing that in the event of his death his wife was to take over the management of the properties and receive the same salary.
After some three years the trust operation did not prove successful1949 U.S. Tax Ct. LEXIS 236">*239 and Tilden conceived the idea of borrowing money from the Federal Land Bank of Columbia, in Columbia, South Carolina, (hereinafter referred to as the Land Bank) to refinance the property. Since the Land Bank was prohibited by law from making a loan of more than $ 50,000 to any one individual, six separate applications for loans of $ 50,000 each were filed by Tilden, his wife, and four of their children. A supplemental statement attached to the application filed by Tilden reads in part as follows:
The property as described in the original application attached to this supplement consists of approximately one-sixth of the property owned by L. W. Tilden (same being one-sixth in amount of value of said property). Five other applications 12 T.C. 507">*509 are being made for loans on the five other groups to the Federal Land Bank of Columbia. * * *
* * * *
Attached hereto is a statement of the entire obligations against all of the lands of L. W. Tilden. These obligations have been divided up so that an allocate proportion has been placed against each group. * * *
After these applications were filed, Tilden and his attorney visited Columbia to discuss the applications with the officials of 1949 U.S. Tax Ct. LEXIS 236">*240 the Land Bank and were advised that the Land Bank could not lend more than $ 155,000 on the six applications. It was indicated at this conference that the aggregate loan might be increased if ten applications were filed. Tilden stated that he expected his wife and children to inherit his properties anyway and that he would make an equitable division among them in order that ten applications might be filed. On January 29, 1934, ten applications were submitted to the Land Bank by Tilden, his wife, and their eight adult children, for loans in the amount of $ 30,000 each. Each application offered part of Tilden's property as security for the requested loan, and attached to each was a statement reading in part as follows:
General: The property as described in the original application, to which this supplement is attached, consists of approximately one-tenth (1/10) of the property owned by L. W. Tilden (same being approximately one-tenth (1/10) in amount of value of said property), said property having been recently conveyed to the applicant by L. W. Tilden. The conveyance was made for the purpose of equitably distributing his estate at this time rather than distributing it by Will. 1949 U.S. Tax Ct. LEXIS 236">*241 The deed covering the properties described in the original application contains all of this applicant's share of L. W. Tilden's Estate as it would be devised under Will. In other words, L. W. Tilden has nine children, one of whom is under age at the present time, and a wife, who are all living. He has divided his property up into ten (10) different tracts, conveyed one to his wife, and one to each of his eight children and retained one tract in his name that will be devised or deeded to his minor daughter when she arrives at maturity. Each heir is assuming one tenth (1/10) of the obligations now existing against all of the properties. There is a master mortgage over all the property given to secure an indebtedness of approximately $ 300,000. Said master mortgage was given to, and does protect creditors of Mr. L. W. Tilden's who had individual mortgages on separate tracts of land, as well as the unsecured creditors.
* * * *
Attached hereto is a statement of the entire obligations against all of the lands of L. W. Tilden. These obligations have been divided up so that an allocate proportion has been placed against each group. If the ten applications are approved in the amount1949 U.S. Tax Ct. LEXIS 236">*242 requested, the entire indebtedness as set up by the attached statement can and will be liquidated and satisfied and all mortgages and encumbrances released and the mortgage to the Federal Land Bank would be a first and prior lien against all of the property set up in the respective mortgages.
It is the plan and intention that although the properties will be owned by the respective parties making the applications, that the said properties shall be farmed and operated as a whole by L. W. Tilden, who has had many years experience 12 T.C. 507">*510 in citrus, as well as truck farming. In the event anything should happen that would render L. W. Tilden incapable of operating the property, C. G. Tilden, Robert W. Tilden, Frederick T. Tilden or Harold C. Tilden, sons of L. W. Tilden, who are over the age of 21, are capable of operating and managing the said property to the best interests and advantages of the said properties, and the respective parties interested.
Properties are adequately equipped with machinery and implements to cultivate and care for same as one unit. This personal property is retained by L. W. Tilden for the purpose of working and caring for all of the properties in one unit.
1949 U.S. Tax Ct. LEXIS 236">*243 On July 3, 1934, Tilden executed eight deeds conveying to his wife and all of their children, except Robert, the tracts of land upon which their respective applications to the Land Bank were based. These eight deeds were duly recorded on the same date. The deed to Robert was not executed until August 19, 1936, and was recorded on October 15, 1936. Each of the eight deeds executed on July 3, 1934, recited that it was executed "in consideration of the sum of Ten Dollars and other valuable considerations and love and affection" and each contained a statement as follows: "This deed is given subject to 1/10 of the outstanding mortgage indebtedness now against the grantor's properties."
The deed to Robert did not recite that it was given subject to one-tenth of the outstanding mortgage indebtedness. No gift tax returns covering said transfers were ever filed.
Shortly after January 29, 1934, the Land Bank made a tentative commitment to lend $ 175,000 on the ten applications. Two of these applications were subsequently withdrawn and only eight abstracts of title were submitted. While the abstracts were being examined, the Land Bank officials referred the applications to field representatives1949 U.S. Tax Ct. LEXIS 236">*244 for further investigation. During this investigation Tilden and all members of his family were collectively interviewed on two occasions. Tilden advised the field representatives that the ten applications had been hurriedly filed and because of haste his properties had not been equally divided, but that he intended his wife and children to share the property equally and he proposed to effect a more equitable division after the Land Bank loans were paid off. While the matter was till pending, he wrote the Land Bank a letter as follows:
October 27, 1934.
Mr. A. R. Updike,
Federal Land Bank, Columbia, S. C.
Dear Sir:
Replying to your wire of the 24th instant in reference to the assumption of proportionate part of indebtedness by various applicants, will say that by the acceptance of the deed each applicant understood they were assuming one-tenth of the outstanding indebtedness against that particular piece of property. The deed from me as grantor to the applicant was made subject to one-tenth of the outstanding mortgage indebtedness against the property, with the understanding 12 T.C. 507">*511 that each grantee was assuming one-tenth of the obligations of the grantor. I am having1949 U.S. Tax Ct. LEXIS 236">*245 each of the applicants notify you that this was the true intent and meaning of the conveyance.
In reply as to whether or not the properties offered as security will be operated by applicants, or by agents as separate, independent farms, or as one farming enterprise, will say that it was the intention that all of the properties would be cared for and cultivated under one management, the expense of each tract to be accurately accounted for and charged against that particular tract. The profits from fruit and vegetables from each tract will be kept separately and accounted for. The properties are so situated that they can be managed very economically as a whole under one management rather than under separate and individual heads. However, if it is the desire of the Federal Land Bank that each applicant manage and care for his or her particular property, then that will be done.
I might state further along this line, that it is the intention of all of the applicants, who as you know are my legal heirs, that the properties be operated so that all will be taken care of. For instance, after all operating expenses have been paid and proper sinking funds created to care for the properties, 1949 U.S. Tax Ct. LEXIS 236">*246 net profits derived from the separate tracts shall be used whenever necessary to assist in paying the interest, taxes and annual curtailment due to the Federal Land Bank on any tract that does not show sufficient profit to take care of its own obligations.
Very truly yours,
[Signed] L. W. Tilden
The Land Bank officials concluded that the ten applications were so interrelated as to constitute a single risk and determined the applicants were ineligible for a total loan of more than $ 50,000.
During the fall of 1935, four new applications for loans in the amount of $ 50,000 each were submitted. These applications were filed by the same persons who had filed the ten applications, but the grouping of the applicants was changed. On these applications the Land Bank tentatively committed itself to a loan of $ 110,000. On October 27, 1936, the commitment was canceled because of the applicants' failure to accept the commitment and close the loans.
In 1936 the properties produced some profit, and the two principal creditors, the Exchange National Bank of Tampa and Armour & Co., agreed to assist in refinancing the indebtedness if a corporation was formed to operate the properties. Other creditors1949 U.S. Tax Ct. LEXIS 236">*247 agreed to waive defaulted interest and discount their claims 50 per cent in the refinancing plan. In October 1936 petitioner was incorporated, with an authorized capital of $ 100,000, consisting of 1,000 shares of common stock of the par value of $ 100. At the first meeting of the board of directors, held on October 13, 1936, a resolution was adopted reading in part as follows:
Resolved that this corporation hereby accepts the offer of L. W. Tilden, Jennie May Tilden, Clarence G. Tilden, Gladys Mae Robinson, Harold C. Tilden, Grace Tilden Starke, Robert Willis Tilden, Doris Tilden Davis, Frederick T. Tilden and L. W. Tilden II to convey to it in full payment of the One Thousand (1,000) shares of the Capital Stock, each of the par value of $ 100.00, authorized by the Certificate 12 T.C. 507">*512 of Incorporation issued to this Company, the following property situate in Orange County, Florida, to wit:
[Here follows a description of real estate by metes and bounds.]
in consideration of:
1. That this Company issue 1000 shares of its authorized Capital Stock to the following persons in the following proportions:
| Shares | |
| L. W. Tilden | 100 |
| Jennie May Tilden | 100 |
| Clarence G. Tilden | 100 |
| Gladys Mae Robinson | 100 |
| Harold C. Tilden | 100 |
| Grace Tilden Starke | 100 |
| Robert Willis Tilden | 100 |
| Doris Tilden Davis | 100 |
| Frederick T. Tilden | 100 |
| L. W. Tilden II | 100 |
1949 U.S. Tax Ct. LEXIS 236">*248 2. That this Company assume a certain mortgage given by L. W. Tilden and Jennie May Tilden, his wife, to the Exchange National Bank of Tampa, dated September 4, 1926 and recorded in Mortgage Book 139, page 270, Public Records of Orange County, Florida, embracing a portion of the property above described and covenant and agree to pay the indebtedness thereby secured.
3. That this Company assumes and agrees to pay the debts now due and owing from the offerers, namely:
[A description of the obligations follows.]
4. That this Company accept the title to the said property, subject to the aforesaid mortgage to the Exchange National Bank of Tampa, and subject to the State, County and City taxes for the year 1936, and all years thereafter, and paving assessments now levied against the said properties; also subject to all legitimate claims of creditors.
* * * *
Resolved Further, that this corporation accepts the obligations hereinabove set forth and agrees to pay the same.
* * * *
Resolved Further, that the proper officers of this Company be, and they are hereby authorized to issue as fully paid and nonassessable the 1000 shares of this Company to the offerers or their nominees.
Resolved Further, 1949 U.S. Tax Ct. LEXIS 236">*249 that in the judgment of the Board of Directors of this Company the value of the property to be conveyed to this corporation is at least equivalent to the full value of the stock to be issued in payment thereof and of the debts and obligations to be assumed by this corporation as part of the purchase price of the said property, and that in the considered judgment of this Board the said property has a fair, just and reasonable value of at least $ 362,000.00.
The offerors executed and delivered to petitioner deeds covering the properties described in the aforesaid resolution. The deeds executed by Jennie May Tilden and the adult children conveyed the tracts of land which Tilden had conveyed to them on July 3, 1934, during the negotiations with the Land Bank. The deed from Robert conveyed to petitioner land which Tilden had transferred to him by deed dated August 19, 1936. Tilden by two deeds conveyed to petitioner the remainder 12 T.C. 507">*513 of his properties. One of the deeds executed by Tilden and the deed executed by Robert contained the following provision:
Subject to a first mortgage executed by L. W. Tilden and Jennie May Tilden to the Exchange National Bank of Tampa, Florida, 1949 U.S. Tax Ct. LEXIS 236">*250 dated the 4th day of September A. D. 1936 [sic *] recorded in Mortgage Book 139, page 270, Public Records of Orange County, Florida, now being in the sum of $ , and the said L. W. Tilden, Inc. does hereby assume and agree to pay said mortgage.
[* The apparent correct date of the mortgage was September 4, 1926.]
The other nine deeds did not contain this provision.
Ten stock certificates were prepared and executed by petitioner's officers. The certificates were made out in the names of L. W. Tilden, Jennie May Tilden, his wife, and eight of their children who transferred property to petitioner. Each certificate was for 100 shares. The certificates were not detached from the stock book until some time after Tilden's death in 1941. Attached to each stub in the stock certificate book is a Florida documentary stamp for $ 10 and a Federal documentary stamp for $ 10 of the series of 1941. Across or adjacent to the Florida stamps was impressed the date of February 28, 1941.
As a part of the refinancing plan, Tilden and the trustees under the master mortgage transferred to petitioner the following additional assets:
| Cash | $ 17,546.02 |
| Farm machinery and equipment | 11,475.00 |
| Accounts receivable | 12,000.00 |
1949 U.S. Tax Ct. LEXIS 236">*251 Also as a part of the refinancing plan, petitioner, under date of December 1, 1936, entered into a written agreement to save the trustees harmless from any income tax lien which might become due for the portion of the year 1936 in which the trustees operated the property. Petitioner further agreed to pay the income tax for the year 1936 and for all the years in which the trustees operated said properties.
After the refinancing plan was approved on December 5, 1936, no further meeting of the stockholders of petitioner was held until after Tilden's death. Only one directors' meeting was held during this period. This meeting was held on June 1, 1937, for the purpose of approving a contract between petitioner and Tilden. This agreement in substance provided that petitioner would pay to Tilden the sum of $ 600 per month for life, and upon his death would pay the sum of $ 600 per month to Jennie May Tilden, if she survived him, during her natural life. From 1936 until the time of his death, January 6, 1941. Tilden served as president of petitioner and supervised and directed its activities.
The opening entries on petitioner's books are dated October 1, 1936. The books were prepared1949 U.S. Tax Ct. LEXIS 236">*252 and opened in 1942. The assets and liabilities shown are as follows: 12 T.C. 507">*514
| Assets | |
| Cash | $ 17,546.02 |
| Accounts receivable | 12,000.00 |
| Trees (itemized) | 336,567.75 |
| Land (itemized) | 175,725.00 |
| Buildings (itemized) | 27,600.00 |
| Irrigation equipment | 41,910.00 |
| Farm machinery and equipment | 11,475.00 |
| Total | 622,823.77 |
| Liabilities | |
| Mortgages payable (itemized) | $ 150,164.29 |
| Notes payable (itemized) | 119,906.09 |
| Capital stock | 100,000.00 |
| Capital surplus | 252,753.39 |
| Total | 622,823.77 |
As of December 1, 1936, Tilden's debts assumed by petitioner aggregated $ 292,546.44.
Tilden died intestate, and his son, L. W. Tilden, II, qualified as administrator of his estate. The inventory of the estate's assets filed with the probate court did not include any shares of the common stock of petitioner. Virginia Tilden, the youngest child of L. W. Tilden, who was a minor in 1936, when petitioner was organized, filed a claim with the probate court, alleging that she was the owner and entitled to the possession of 100 shares of the capital stock of petitioner, evidenced by certificate No. 7, issued in the name of L. W. Tilden, and that since the issuance of the shares on October1949 U.S. Tax Ct. LEXIS 236">*253 14, 1936, until the death of Tilden, he had held these shares as trustee for her.
The administrator filed an answer in writing, alleging that he was familiar with the situation and that said Virginia Tilden was the owner and entitled to the possession of said stock, and that L. W. Tilden was holding the same as trustee. He prayed that an order be entered authorizing and directing the transfer of the stock to Virginia Tilden. Thereafter the probate court awarded to Virginia the 100 shares of petitioner's capital stock held by L. W. Tilden.
For the calendar year 1935, Tilden and his wife filed a joint return, upon which they disclosed the result of the operations from all the Tilden properties. This result was a net loss of $ 24,871.94, consisting of an operating loss of $ 7,048.85 for 1935, and a carry-over net operating loss of $ 17,823.09 from 1934.
On March 15, 1937, Tilden and his wife filed a joint return for 1936, disclosing a net operating profit of $ 12,458.54 from all the Tilden properties. However, deductions were claimed in the amount of $ 12,578.60, and the net result shown was a loss of $ 120.06. Among the deductions claimed was a bad debt due from Tilden's son Harold1949 U.S. Tax Ct. LEXIS 236">*254 in the amount of $ 12,500. This return did not disclose any gain or loss resulting from the transfer of properties to petitioner in exchange for its capital stock in 1936. This 1936 return was subjected to investigation and in the internal revenue agent's report, dated December 3, 1938, he computed a revised net income of $ 27,990.97, by disallowing the bad debt deduction and recomputing the allowance claimed for depreciation, and recommended a deficiency of $ 3,150.71. In making 12 T.C. 507">*515 these adjustments the agent prepared a depreciation schedule from information furnished by Tilden and data secured from his books. This schedule showed in summary the following:
| Cost | $ 158,365.95 |
| Depreciation allowed prior years | 91,114.90 |
| Balance to depreciate at beginning of year | 67,251.05 |
| Depreciation allowed for 1936 (9 months) | 4,921.94 |
| Balance to depreciate at end of year (10/1/36) | 62,329.11 |
| Depreciation reserve at end of year | 96,036.84 |
Tilden protested the deficiency. The matter was referred to the field agent for further investigation. During this subsequent investigation, Tilden and his accountants represented that the farm properties were operated as a joint venture1949 U.S. Tax Ct. LEXIS 236">*255 or partnership consisting of Tilden and his wife and eight children. As a result of this representation, the field agent agreed to accept a partnership return, which was filed on or about May 6, 1939, under the name "L. W. Tilden and Family." On this return the allowance for depreciation was computed according to the determination made in the field agent's original report and the net operating profit of $ 27,990.97 was allocated equally among Tilden, his wife, and their eight children. At the same time original and amended returns were filed by Tilden and his wife and eight children, upon which they reported a one-tenth share of the income disclosed on the partnership return. These returns did not disclose any profit or loss resulting from the transfer of properties to petitioner in exchange for capital stock during 1936.
The same revenue agent also investigated the income tax return filed by petitioner for the fiscal year ended September 30, 1937. His report dated November 18, 1939, recommended a deficiency of $ 8,105.37, which resulted in part from an adjustment of the allowance claimed for depreciation. In making this adjustment the revenue agent treated the exchange of properties1949 U.S. Tax Ct. LEXIS 236">*256 for capital stock in 1936 as a nontaxable transaction and computed the deduction for depreciation on the same basis on which it had been computed in the earlier report and in the partnership return filed for 1936, except the remaining useful life of each asset was reduced by nine months to account for the period between January 1 and September 30, 1936.
In summary, the computation was as follows:
| Cost or basis assets acquired 10/1/36 | $ 62,329.11 |
| Assets acquired subsequent to 10/1/36 | 5,054.06 |
| Total basis | 67,383.17 |
| Depreciation allowed for year | 6,991.32 |
| Balance to depreciate 10/1/37 | 60,391.85 |
| Depreciation reserve at end of year | 6,991.32 |
12 T.C. 507">*516 In addition the revenue agent disallowed a deduction of $ 12,000 which petitioner had claimed as a bad debt due from Clarence G. Tilden. This account receivable had been taken over by petitioner at the time of its organization. Petitioner agreed to the adjustments.
On November 13, 1941, petitioner filed a claim for refund covering the fiscal year ended September 30, 1937, asserting that depreciation had been incorrectly computed because the exchange of properties for stock in 1936 was a taxable transaction and petitioner's1949 U.S. Tax Ct. LEXIS 236">*257 basis was the cost to it and not the cost to the transferors.
For the fiscal years ended September 30, 1941 and 1942, petitioner filed income tax returns disclosing net income for such periods in the respective amounts of $ 15,054.07 and $ 67,527.44. On these returns depreciation was computed on the basis of petitioner's cost.
In the deficiency notice the respondent allowed depreciation for the fiscal years ended September 30, 1941 and 1942, computed upon the remaining undepreciated basis of petitioner's properties to its transferors as of October 1, 1936, plus the cost of subsequent additions. The basis upon which this computation was made is identical with the depreciated basis as of October 1, 1936, which was established in the revenue agent's report covering the 1936 joint income tax return of Tilden and his wife, and with the depreciated basis shown in the schedule attached to the 1936 joint venture or partnership return. The same basis was used for excess profits tax adjustments made in the notice of deficiency.
Petitioner was liquidated in 1945. In the liquidation Mrs. Tilden and each of the nine children received an undivided one-tenth interest in the citrus groves, truck1949 U.S. Tax Ct. LEXIS 236">*258 farm land, and other properties distributed by petitioner. Since the liquidation the properties have been operated by the former stockholders as an alleged partnership. On their individual income tax returns for 1945, the stockholders disclosed the transaction and each reported a gain therefrom as follows:
| Liquidation L. W. Tilden, Inc. | $ 84,170.23 |
| Less: Cost | 32,039.31 |
| Total gain | 52,130.92 |
| Gain taken into account (50%) | 26,065.46 |
OPINION.
The basic issue involves the propriety of the respondent's determination that the 1936 transaction whereby petitioner exchanged all its capital stock for the Tilden properties was a nontaxable exchange within the purview of section 112 (b) (5) of the 12 T.C. 507">*517 Revenue Act of 1936, as amended. 1 Petitioner opposes this determination. Its position is that the record establishes that the several tracts of land the title to which was conveyed to petitioner by the wife and children of Tilden, respectively, were of unequal value and, since each grantor received an identical stock interest, the provision of section 112 (b) (5) which requires that the amount of stock received by each transferee be substantially in proportion to his1949 U.S. Tax Ct. LEXIS 236">*259 interest in the property prior to the exchange has not been met. The position of petitioner seems to be based primarily on the premises that (1) the warranty deeds from Tilden to his wife and children and from them to petitioner, duly recorded, respectively purporting to convey absolute title to specific property, can not be successfully attacked, and (2) even if such an attack be legally possible, no factual premise exists here, since there is no evidence of any agreement either written or verbal in conflict with the deeds. We disagree.
1949 U.S. Tax Ct. LEXIS 236">*260 It must be noted that the respondent is not a party to any of these conveyances. Cf. . Moreover, we think this record, even though circumstantially, clearly establishes that the grantees in the deeds from Tilden took, with resulting trusts that they held respectively, any excess above their pro rata equal shares in all Tilden's net property, in trust for his other grantees who received less than such shares. Of course, such a trust is outside the Statute of Frauds and may be established by parol. ; ; ; ; ; . These grants from Tilden to his wife and children were primarily made in an endeavor to refinance the grantor's indebtedness. The formation of petitioner and the exchange of the several tracts of land for its capital stock were planned and carried out to accomplish that same purpose. There can be 1949 U.S. Tax Ct. LEXIS 236">*261 little doubt that all of the members of the Tilden family understood that L. W. Tilden intended to distribute his properties 12 T.C. 507">*518 equally among his wife and children and, notwithstanding the fact that the deeds described tracts of land having varying values, it was understood that the respective interests of the wife and children in the property were to be equal. True, as petitioner argues, there is no evidence of any written agreement to that effect. Nevertheless, the circumstances, including the conduct of the parties subsequent to the conveyances, strongly support the existence of such an understanding at the time the conveyances by Tilden to his wife and children were made and continuing thereafter until, we think, that understanding was executed. Briefly summarizing, this record shows that each deed executed in 1934, except the one to Robert, which was not executed until August 1936, recites that it was "given subject to 1/10 of the outstanding mortgage indebtedness now against the grantor's properties." The ten applications filed with the Land Bank, on which it was hoped a large loan would be secured, contained a statement that the property described "consists of approximately1949 U.S. Tax Ct. LEXIS 236">*262 one-tenth (1/10) of the property owned by L. W. Tilden (same being approximately one-tenth (1/10) in amount of value of said property), said property having been recently conveyed to the applicant by L. W. Tilden." The statement also set forth that it was the plan and intention that the properties should be farmed and operated by L. W. Tilden, and that the properties were equipped to be cultivated and cared for as one unit.
For the calendar years 1935 and 1936, L. W. Tilden and his wife filed joint income tax returns, on which results of the operation of all the properties were disclosed. The 1936 return was later subjected to investigation by an internal revenue agent, and a deficiency recommended. The deficiency was protested, and during a subsequent investigation L. W. Tilden and his accountants represented that a joint venture or partnership consisting of Tilden and his wife and eight children operated the farm properties during 1936. The revenue agent agreed to accept a partnership return, which was filed about May 6, 1939. On such return the net operating profit was allocated equally among the members of the joint venture. At the same time L. W. Tilden and his wife and 1949 U.S. Tax Ct. LEXIS 236">*263 eight children filed original or amended returns for 1936, upon which each reported a one-tenth share of the income disclosed on the partnership return. These returns did not disclose any gain or loss from the transfer of the properties to petitioner in 1936 in exchange for all its capital stock.
Petitioner was organized in October 1936 as another phase of the refinancing plan. The offer of the transferees to exchange the properties for all the capital stock and the assumption of liabilities by petitioner, and the resolution of the directors of petitioner accepting the 12 T.C. 507">*519 same, indicate the transferees were jointly offering to exchange the Tilden properties for an equal share of petitioner's stock. Stock certificates for 100 shares each were executed in the names of the several transferees, but were not detached from the stock certificate book until after the death of L. W. Tilden in January 1941. The required Florida documentary stamps appear to have been canceled on February 28, 1941, and the Federal documentary stamps bear the imprint "Series of 1941," and could not have been attached to the certificate stubs prior to that date.
Virginia Tilden, the youngest daughter, 1949 U.S. Tax Ct. LEXIS 236">*264 who became 21 during the year 1936, received no deed and was not a party to the exchange. However, after her father's death in 1941, she filed a claim with the Florida probate court asserting ownership of certificate No. 7 for 100 shares which had been issued in the name of her father, L. W. Tilden. The administrator of the estate of L. W. Tilden filed an answer admitting that Virginia was the owner of and entitled to Certificate No. 7, and prayed that an order be entered directing delivery to Virginia of such certificate. The probate court duly entered such an order.
Petitioner was liquidated in 1945. In distributing its assets petitioner executed a warranty deed conveying to Tilden's wife and the nine Tilden children an undivided one-tenth interest in the citrus groves, truck farm lands, and other properties then owned by it.
We think the only reasonable inference to be drawn from this record is that when the conveyances were made by L. W. Tilden to his wife and children, purporting to convey absolute title to the specific properties later conveyed to petitioner, there were resulting trusts in those grantees who received thereunder any excess above their pro rata equal share1949 U.S. Tax Ct. LEXIS 236">*265 in all of Tilden's net real property for the benefit of his other grantees who received less than such shares. Petitioner argues that no resulting trusts existed here under the law, since these was a written contract supported by a recited consideration, the receipt of which has not been denied. The answer to that is that the consideration here was recitative and not contractual, and, therefore, parol evidence was admissible to establish the resulting trusts. . Moreover, when each of Tilden's grantees formally conveyed to petitioner the property which the deeds from Tilden purported to convey to them and, in return, each received a one-tenth interest in the stock of petitioner, these resulting trusts became executed, and any frailties in their original creation were cured. ; ; .
We, therefore, conclude that in the 1936 transaction the transferees received stock exactly in proportion to the value of the properties contributed 12 T.C. 507">*520 1949 U.S. Tax Ct. LEXIS 236">*266 by each to petitioner. The exchange was a nontaxable transaction within the purview of section 112 (b) (5) of the Revenue Act of 1936, as amended.
In view of this conclusion, the alternative issue relating to depreciation on the citrus groves becomes moot.
Decision will be entered under Rule 50.
Footnotes
1. Section 112 (b) (5) of the Revenue Act of 1936, as amended by section 213 (h) of the Revenue Act of 1939, reads as follows:
"SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * * *
"(b) Exchanges Solely in Kind. --
* * * *
"(5) Transfer to corporation controlled by transferor. -- No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. Where the transferee assumes a liability of a transferor, or where the property of a transferor is transferred subject to a liability, then for the purpose only of determining whether the amount of stock or securities received by each of the transferors is in the proportion required by this paragraph, the amount of such liability (if under section 213 of the Revenue Act of 1939 it is not considered as "other property or money") shall be considered as stock or securities received by such transferor. * * *"↩