*694 1. EXCHANGE. - Petitioners' decedent, knowing that stock owned by him would be retired early in 1924, and being desirous of avoiding taxation in that year on large profit which would result therefrom, agreed on December 31, 1923, to exchange his stock for securities having no readily realizable market value. He endorsed and delivered his stock to bond brokers. They were unable on that day to work out details incident to delivering diversified group of securities which would yield him 7 percent on his investment. They agreed to transfer to his safekeeping account three blocks of bonds as security for performance of their part of agreement. It was agreed that these bonds were not to be retained by him but were to be held only until the diversified group of bonds were delivered to him. He received the latter on January 15, 1924. Held, petitioners' decedent did not consummate an exchange of his stock for either the three blocks of bonds or the diversified group of securities on December 31, 1923; held, further, exchange was consummated on January 15, 1924, when decedent received the diversified group of securities.
2. Provisions of Revenue Act of 1924 (approved June 2, 1924) *695 govern the tax liability resulting from an exchange completed on January 15, 1924.
3. Retroactive provision of Revenue Act of 1924 (section 283) is not unconstitutional.
4. Fair market value of securities at time of their receipt determined.
*452 Petitioners seeking a redetermination of the deficiency in income tax determined by the respondent in the amount of $75,539.72 for the period January 1, 1924, to June 10, 1924. The issue is the amount of taxable gain, if any, realized by the decedent in connection with an exchange of preferred stock in a corporation for unlisted securities. To settle such issue we must determine, (1) whether the exchange was completed in 1923 or in 1924; and (2) if completed in 1924, whether the securities received by the decedent in that year had a fair market value in excess of the March 1, 1913, value of the stock transferred.
FINDINGS OF FACT.
Petitioners are the executors of the estate of George Campbell Rew, deceased, who was a resident*696 of Chicago, Illinois, at the time of his death, which occurred June 10, 1924.
George Campbell Rew was the owner of a substantial interest in the Calumet Baking Powder Co. In 1923, or earlier, he was issued preferred stock for all of his holdings, pursuant to a plan agreed upon between him and the other chief owner of the company, the plan contemplating that all of the preferred stock was to be retired as soon as possible after its issuance. One block of such preferred stock was retired in July of 1923 and the remaining stock, consisting of 6,150 shares, was retired on January 15, 1924.
Rew, in July or August of 1923, knowing that the 6,150 shares owned by him, which had a low cost basis, were to be retired on or about January 15, 1924, for approximately $650,000, became apprehensive *453 of the large income tax he would probably have to pay. He consulted an attorney familiar with tax laws, who called his attention to a provision in the Revenue Act of 1921 (applicable to income of 1923) under which, if the stock were exchanged for securities having no "readily realizable market value", the transaction would be nontaxable. He took a long time in making up his mind whether*697 to exchange his stock for such a type of securities, but finally decided to do so, and instructed the attorney to prepare the necessary papeers. He then went to California without having signed any agreement and without completing the transaction, returning on December 31, 1923, at the urgent telegraphic request of the attorney.
About noon on December 31, 1923, Rew and his attorney had a conference with officials of Peabody, Houghteling & Co. (hereinafter referred to as Peabody), an investment banking house engaged in underwriting and distributing unlisted industrial and real estate bonds, the conference being held at Peabody's office and continuing through most of the afternoon. Rew had the certificate for 6,150 shares of Calumet Baking Powder stock with him, and sometime during the afternoon, endorsed it and delivered it to Peabody, after, or contemporaneously with, signing a certain agreement hereinafter referred to.
The agreement had been prepared by Rew's attorney, and provided that "Rew agrees to exchange the shares of stock" for "certain securities detailed in the attached schedule designated as 'Schedule A.'" The original schedule could not be located, nor was a copy*698 available; but the evidence as to its contents indicates that it contained block designations of approximately 30 different kinds, or issues, of bonds which Rew would accept in exchange for his stock - "a general designation to be later superseded by details as to numbers and maturity and amounts." December 31 was practically a holiday and it was impossible to work out all the details, assemble the securities, and deliver them to Rew on that day.
Rew, having endorsed and delivered his certificate of stock to Peabody, "wanted to be put in a protected position", "if anything untoward" happened to Peabody before "the mechanics were worked out" by which there would be delivered to him blocks of securities which would yield a 7 percent return upon his investment. Peabocy, therefore, in order to secure the performance of its part of the agreement, agreed to transfer to Rew's account for safekeeping with it, the following:
| Garland Building bonds, par value | $419,500 |
| Orrington Building bonds, par value | 150,000 |
| C. G. Conn debentures, par value | 109,000 |
The transaction was entered on the books of Peabody as an exchange on December 31, 1923, of Rew's certificate for the*699 three blocks *454 of bonds and said stock was listed among the assets of Peabody in its inventory as of December 31, 1923. It was understood, however, that Rew was not to retain those particular bonds but that they were to be returned when he received the bonds originally contemplated.
While the above blocks of bonds were shown upon the books of Peabody as delivered to Rew and left with it for safekeeping, the bonds were not physically set aside for him and no bonds were actually deposited in safekeeping for him on that date or at any time prior to January 15, 1924. Peabody, however, had in its inventory an amount of each of said bonds in excess of the amounts which it agreed to deposit in safekeeping.
The 6,150 shares of Calumet Baking Powder preferred stock were called for retirement on January 15, 1924. The certificate of stock therefor, although duly endorsed and turned over by Rew to Peabody, had not been surrendered by Peabody for transfer upon the books of the issuing company. On January 15, 1924, Rew received two checks from the Calumet Baking Powder Co., one in the amount of $650,000 to retire the stock and one in the amount of $10,762.50 for dividends accrued. *700 Both checks were endorsed by Rew, without recourse, to the order of Peabody and were cashed by it.
On January 15, 1924, Peabody wrote Rew, stating: "We take from you the following bonds:" (listing Garland Building bonds of the par value of $419,500, Orrington Building bonds of the par value of $150,000, and C. G. Conn debentures of the par value of $109,000) and "in exchange for same, we give you certain other bonds as listed on following pages." (then follows a list of the 30 blocks of bonds delivered to Rew on January 15, 1924). The same date Peabody entered a sales voucher in its records, showing on its books for the first time the transfer to Rew of the 30 securities. Most of the securities shown in this list were also shown in the schedule attached to the agreement of December 31, 1923. The securities shown in the sales voucher had a fair market value on January 15, 1924, of $660,272.50, including the accrued interest.
In the communication of January 15, 1924, bond numbers were listed for the three blocks of Garland, Orrington, and Conn bonds which Peabody stated it was taking from Rew. Approximately 100 bonds bearing the same numbers had been sold by Peabody to other*701 customers in 51 separate transactions during the period from December 31, 1923, to January 15, 1924.
The record does not disclose whether the decedent kept his books and filed his returns on the cash or on the accrual basis.
The respondent determined that the basis for gain or loss on decedent's preferred stock was its March 1, 1913, value of $57,370.27; that within the period between January 1, 1924, to June 10, 1924, *455 decedent received $650,000 as the selling price of this stock; and that the difference between these amounts, $592,629.73, should be added to the decedent's income for 1924. He also determined that the decedent received during the same period unreported dividends on the 6,150 shares of Calumet stock aggregating $10,762.50. The deficiency herein results from these determinations.
OPINION.
MELLOTT: Petitioners contend that their decedent, Rew, consummated an exchange on December 31, 1923, of his preferred stock for bonds and securities having no readily realizable market value; that the exchange was not completed in 1924, and that respondent erred in determining that Rew realized a taxable gain in that year. In the alternative they contend that*702 even should we decide that the exchange was completed in 1924, Rew did not realize a taxable gain as the transaction was completed before the passage of the Revenue Act of 1924 and the bonds and securities acquired did not have a readily realizable market value.
The Revenue Act of 1921 provides that on an exchange of property for other property no gain shall be recognized unless the property received in exchange has a readily realizable market value. Subsequent acts, including the 1924 Act, require the recognition of gain where the property acquired in the exchange had a fair market value at the time of the exchange. We show in the margin the pertinent provisions of the Revenue Acts of 1921 and 1924 and the regulasions thereunder. 1
*703 The first question we must decide is whether or not Rew, on December 31, 1923, consummated an exchange of his stock for bonds *456 or securities having no readily realizable market value. Petitioners argue that Rew, by endorsing and delivering his certificate of stock to Peabody, performed every act required of him under the terms of the agreement entered into on December 31, 1923, and that it necessarily follows that the exchange was complete on that date. We do not agree with this contention. It is not clear whether petitioners are claiming that Rew received in the exchange the three blocks of Garland, Orrington, and Conn bonds or the 30 different securities listed in the schedule attached to the exchange agreement. Upon brief they argue the former, while the petition indicates an evident reliance upon the latter. It is obvious that Peabody did not give, or intend to give, Rew both blocks of bonds in exchange for his stock, and apparently petitioners make no such contention. In order to determine the above question, we must decide which, if either, of the blocks of bonds were received in the exchange. We shall discuss first petitioner's contention with reference to*704 the three blocks of bonds.
The evidence discloses that Rew desired to exchange his stock on December 31, 1923, for a diversified group of securities having no readily realizable market value, which would give him a 7 percent return upon the amount invested. His attorney assured him that such a transaction would not be subject to Federal income tax in 1923 but might be taxable in 1924. When he attempted to consummate the exchange on December 31, 1923, he learned that the mechanics incident to the delivery of such a large group of securities could not be completed on that day, which was practically a holiday. Having endorsed his certificate of stock in blank and turned it over to Peabody, he desired to be put in a protected position, and Peabody, therefore, to secure the performance of its part of the agreement, which contemplated that it should ultimately transfer to him the diversified group of bonds, agreed to transfer to his safekeeping account the three blocks of bonds.
The transaction was entered on the books of Peabody as an exchange of Rew's stock for the three blocks of Garland, Orrington, and Conn bonds, and he was given a copy of an invoice or journal voucher listing*705 both the stock and bonds and containing the phrase that it was "to record the transfer to George Campbell Rew of [three blocks of bonds, listing them] in exchange for 6,150 shares of Calumet Baking Powder Company first preferred stock." But bookkeeping entries are only evidential and are not conclusive. Doyle v. Mitchell Brothers Co.,247 U.S. 179">247 U.S. 179. Our decision must rest upon the actual facts as shown by all the evidence. We shall briefly allude to some of such facts, in addition to those just mentioned.
*457 An examination of the amended petition discloses that no mention is made in it of any exchange of Rew's stock for the three blocks of bonds. Petitioners assign as error "the failure of the Commissioner to find that George Campbell Rew on December 31, 1923, received in exchange for 6,150 shares of preferred stock of Calumet Baking Powder Company the securities named hereinbelow, * * *." (The securities named are the 30 different blocks of bonds received by decedent on January 15, 1924.) Moreover, the record fails to disclose any agreement between Rew and Peabody providing for the exchange of his stock for the three blocks of bonds. On the contrary, *706 it discloses that such bonds were intended merely as security for the performance by Peabody of its part of the agreement of December 31, and there was a definite understanding that Rew could not retain such bonds but was bound to return them to Peabody when he received the diversified group of bonds designated in the original schedule, or those which it was found necessary to substitute therefor.
No manual delivery of the three blocks of bonds was made to Rew during the period between December 31, 1923, and January 15, 1924, and none were actually set aside or deposited in a separate compartment in safekeeping for him. However, during such period, Peabody had in its inventory a number of the bonds or interim certificates of each of said issues in excess of the amount which it agreed to deposit in safekeeping for Rew.
We are convinced that there was not an exchange of Rew's stock for the three blocks of bonds on December 31, 1923. There was no "reciprocal conveyance of the thing given, and of the thing received in exchange"; (Preston v. Keene,39 U.S. (14 Pet.) 132, 137); no "mutual transfer of * * * property for property other than money." (23 C.J. 184, *707 et sequa and cases cited.) Nor did the parties intend that title should pass (55 C.J. 529, et sequa ) and that each should be both a vendor and a vendee. The evidence referred to above indicates that the transaction was more in the nature of a pledge, Rew having constructive possession, but not title, of property owned by Peabody, as security for the performance of its obligation to make delivery of the 30 blocks of bonds.
Even if we should hold that an exchange of the stock for the three blocks of bonds was consummated on December 31, 1923, we could not set aside the deficiency. Had such an exchange taken place, the three blocks of bonds, having no readily realizable market value, would have had in Rew's hands, the same basis for determining gain or loss upon sale or other disposition that the shares of stock had, viz., $57,370.27. If they were exchanged, on January 15, 1924 - and under this theory we would of necessity have to give full force and *458 effect to Exhibit D which shows such exchange - for the diversified group of 30 blocks of securities having a fair market value of $660,272.50, a tax upon the difference between such basis and such fair market value*708 would have been due.
We shall now consider the question of whether or not the decedent on December 31, 1923, exchanged his stock for the securities listed on the schedule attached to the original agreement.
It is unnecessary to repeat the facts in detail. Schedule A now attached to petitioners' Exhibit 1, lists the 30 securities which were delivered to Rew on or about January 15, 1924. This schedule, however, was not identified as being the schedule originally attached to the agreement at the time it was signed. It can not be determined from the evidence just what bonds or securities were listed on the original schedule, for neither it nor a copy could be located. Apparently, however, the original schedule contained block designations of approximately 30 different kinds of securities which Rew would accept in exchange for his stock. No details as to numbers, maturities, and amounts of these securities were included therein. Between December 31 and January 15 the list contained on the original schedule was modified in accordance with negotiations carried on between Rew and Peabody. The evidence clearly indicates that Rew did not know on December 31 exactly what securities*709 he was to receive, and they were not distinguishable on that date from other securities in the vaults of Peabody. In Preston v. Keene, supra, the Supreme Court defined an exchange in the following language:
An exchange is an executed contract; it operates, per se, as a reciprocal conveyance of the thing given, and of the thing received in exchange. * * * It enters into the very idea of the exchange, that the thing given or taken in exchange shall be specific, and so distinguishable from other things of the like kind as to be clearly known and identifiable.
We are convinced that on December 31, 1923, the diversified group of securities Rew was to receive for his stock could not be identified either by the decedent or Peabody. Under such circumstances, there could be no "reciprocal conveyance of the thing given, and of the thing received in exchange." We therefore conclude that the contract remained executory; title to the securities was not transferred to the decedent; and the exchange was not completed on that date. Cf. *710 Ellis & Myers Lumber Co. v. Hubbard,123 Va. 481">123 Va. 481, 493; 96 S.E. 754">96 S.E. 754; sec. 17, Uniform Sales Act (enacted in Illinois in 1915); Williston on Sales, 2d Ed., vol. 1, p. 520; 55 C.J. 541, 532.
Even assuming, but not admitting, that the securities the decedent was to receive in exchange for his stock were identifiable and distinguishable from other securities of a like kind in the possession of Peabody on December 31, 1923, we would still have to decide *459 that no exchange was completed for tax purposes until 1924. The respondent determined that the exchange was completed in 1924 when the decedent actually received the group of 30 securities. In order to overcome the prima facie correctness of this determination, the burden was on petitioners to show either that the securities were received in 1923, or that decedent was on the accrual basis and his right to receive them accrued in 1923. The evidence clearly shows that the securities were actually received in 1924, but no evidence was introduced showing that decedent kept his books on the accrual basis, even though this matter was called to the attention of petitioners' counsel at the hearing. *711 We must therefore uphold respondent's determination that the exchange was completed, and taxable, if at all, in the year 1924 when the securities were received, as petitioners failed to sustain their burden of proving that decedent kept his books and filed his returns on the accrual basis. Helvering v. Nibley-Mimnaugh Lumber Co., 70 Fed.(2d) 843.
In support of their contentions that an exchange was completed on December 31, 1923, petitioners cite and rely upon the following cases, among others: Brunton v. Commissioner, 42 Fed.(2d) 81, affirming 15 B.T.A. 348">15 B.T.A. 348; certiorari denied, 282 U.S. 889">282 U.S. 889; Dahlinger v. Commissioner, 51 Fed.(2d) 662, affirming 20 B.T.A. 176">20 B.T.A. 176; certiorari denied, 284 U.S. 673">284 U.S. 673; Eavenson v. Commissioner, 51 Fed.(2d) 664, affirming 20 B.T.A. 238">20 B.T.A. 238; certiorari denied, 284 U.S. 672">284 U.S. 672; Commissioner v. Swift, 54 Fed.(2d) 746, affirming 20 B.T.A. 1099">20 B.T.A. 1099; *712 Davidson & Case Lumber Co. v. Motter, 14 Fed.(2d) 137 (Dist. Ct. Kan.); Southern California Rock & Gravel Co.,26 B.T.A. 296">26 B.T.A. 296; Dakota Creek Lumber & Shingle Co.,26 B.T.A. 940">26 B.T.A. 940; Nibley-Mimnaugh Lumber Co.,26 B.T.A. 978">26 B.T.A. 978; affd., 70 Fed.(2d) 843; Standard Lumber Co.,28 B.T.A. 352">28 B.T.A. 352. We have carefully examined these cases. Most of them involve sales of property, in which the subject matter was sufficiently specified and identified and the purchase price agreed upon in the years in which the sales were held to be completed for tax purposes. In determining the question presented, this Board and the courts took into consideration the time when the dominion, control, burdens and benefits of ownership passed to the purchasers and the methods of accounting used by the taxpayers. The cases cited are in our opinion distinguishable from the instant case on their facts, and do not support petitioners' conclusion that the exchange here involved was consummated on December 31, 1923.
Having determined that the exchange was completed on or about January 15, 1924, when the decedent received the group*713 of 30 securities from Peabody, it becomes necessary to decide petitioners' alternative contention that the amount of the taxable gain, if any, realized *460 by the decedent is governed by the Revenue Act of 1921 (Section 202(c), supra ), and not by the Revenue Act of 1924 (sections 202(a) and (c), supra ). This contention is predicated upon the fact that the Revenue Act of 1924 was not approved until June 2, 1924. Section 283 of the act, however, provides that those sections with which we are here concerned shall take effect as of January 1, 1924. The taxable gain to be recognized in the instant proceeding is therefore governed by the provisions of the Revenue Act of 1924.
There is no merit in the argument made by petitioners in their reply brief that a statute approved on June 2, 1924, and retroactively taxing a transaction which occurred in January of that year is unconstitutional and in conflict with the Fifth Amendment. The cited cases (Dobbins v. Los Angeles,195 U.S. 223">195 U.S. 223; Blodgett v. Holden,275 U.S. 142">275 U.S. 142; *714 Untermyer v. Anderson,276 U.S. 440">276 U.S. 440; and Nichols v. Coolidge,274 U.S. 531">274 U.S. 531) are not applicable here. With the exception of Dobbins v. Los Angeles, supra, in which the retroactive application of a taxing statute is not involved, they merely enunciate the rule that Congress does not have the power to impose a charge upon a donor because of gifts fully consummated before a taxing statute was enacted. This rule does not apply to income taxes. The revenue acts, beginning with the Act of 1913, and including the War Revenue Act of 1918, have consistently provided for the taxation of income realized from transactions which took place prior to their passage. John S. Garvan,23 B.T.A. 817">23 B.T.A. 817. It is now well settled that such provisions, although retroactive in scope, are constitutional. Brushaber v. Union Pacific Railroad Co.,240 U.S. 1">240 U.S. 1; Fesler v. Commissioner, 38 Fed.(2d) 155; Phipps v. Bowers, 49 Fed.(2d) 996, affirming *715 46 Fed.(2d) 164; certiorari denied, 284 U.S. 641">284 U.S. 641.
The Revenue Act of 1924 provides that the gain from the sale or other disposition of property acquired prior to March 1, 1913, shall be the excess of the amount realized, over the cost or March 1, 1913, value, whichever is greater. (Secs. 202(a) and 204(b) of the 1924 Act.) It also provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. (Sec. 202(c), 1924 Act.) No money having been received in the exchange here under consideration, the amount realized by the decedent was the fair market value of the securities which he received on January 15, 1924.
We have found as a fact that the fair market value of the securities received by the decedent on January 15, 1924, including accrued interest to that date, was $660,272.50. While Lawrence G. Wilson, an auditor of Peabody, testified as a witness for the petitioners that the securities received by decedent on January 15, 1924, were generally *461 sold to the public by Peabody at par, plus accrued interest, or $678,030.70, *716 and that this price represented their fair value, we have found the fair market value to be the amount Peabody charged the decedent for them.
The respondent determined the basis for gain or loss on decedent's preferred stock was $57,370.27, its March 1, 1913, value. No evidence was introduced by petitioners which would warrant our disturbing this determination. In return for the securities received, decedent gave Peabody his stock and accrued dividends in the amount of $10,762.50. We find therefore that the taxable gain realized by the decedent was the difference between $660,272.50 and $68,132.77 ($57,370.27+$10,762.50). We approve the respondent's determination that the decedent received during the period January 1, 1924, to January 10, 1924, unreported dividends on his preferred stock aggregating $10,762.50.
Judgment will be entered under Rule 50.
Footnotes
1. The term "gross income" includes gains, profits and income derived from * * * sales or dealings in property. [Sec. 213(a) of 1921 and 1924 Acts.]
The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. [Regulations 62, art. 22, Act of 1921; Regulations 65, art. 22, Act of 1924.]
Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. [Regulations 62, art. 51, Act of 1921; Regulations 65, art. 50, Act of 1924.]
For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; * * * [Sec. 202(c), Act of 1921.]
Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized. [Sec. 202(a), Act of 1924.]
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. [Sec. 202(c), Act of 1924.]
This title [Title ii, which includes section 202] shall take effect as of Jan. 1, 1924. [Sec. 283, Act of 1924.] ↩