*1069 1. The petitioner during the taxable year was a member of a partnership which held substantially all of the common voting stock of an operating corporation. Petitioner's contention that the accounts of the partnership and of the corporation should be consolidated, pursuant to the provisions of sections 240(d) and 240(f) of the Revenue Acts of 1924 and 1926, denied, in the absence of proof of the necessity for such consolidation of accounts and the facts essential for making an accurate and equitable apportionment of income and expense between the two related businesses. Roessler & Hasslacher Chemical Ci.,25 B.T.A. 915">25 B.T.A. 915; Western Hide & Fur Co.,26 B.T.A. 354">26 B.T.A. 354.
2. The transfer of assets by the partnership to the corporation was a sale.
*413 This is a proceeding for the redetermination of deficiencies in income tax for the years 1924 and 1925 in the amounts of $6,763.04 and $116.62, respectfully. The issues are: (1) Whether or not the accounts of a partnership, of which the petitioner*1070 was a member, and a corporation, of whose common voting stock the partnership owned more than 99 per cent, should have been consolidated for the taxable years under the provisions of sections 240(d) and 240(f) of the Revenue Acts of 1924 and 1926; (2) whether or not the transfer in 1924 of assets by the partnership to the corporation was a capital contribution which did not give rise to recognizable gain to the partnership; and (3) whether or not the partnership realized "income" within the contemplation of the Sixteenth Amendment and the revenue acts on the transfer of said assets to the corporation in 1924.
FINDINGS OF FACT.
The following facts were stipulated by the parties:
The petitioner is an individual with residence at Fort Wayne, Indiana. During the years 1924 and 1925 and prior and subsequent thereto he was a member of the co-partnership Straus Brothers and Company of Fort Wayne, Indiana, owning a one-third interest in said partnership. The other members of said partnership were Simon J. Straus and Isaac D. Straus, who each owned a one-third interest in said partnership. Isaac D. Straus died on May 16, 1921, his estate continuing as member of the partnership during*1071 1924 and 1925.
Prior to 1910 the partnership of Straus Brothers and Company, consisting of S. J. Straus, Isaac D. Straus and the petitioner, was organized and was engaged *414 in the business of buying, selling, leasing, holding and owning farm lands, and dealing in mortgage loans on such farm lands.
On April 1, 1910 the aforementioned business of said partnership was transferred to a corporation organized under the laws of the State of Indiana, said corporation bearing the name of The Straus Brothers Company. Said corporation was organized for carrying on the business theretofore engaged in by the partnership. Practically all of the assets of said partnership were transferred to said corporation and in return the partnership received more than 95% of the corporation's voting common stock. After said transfer the assets of said partnership consisted of said stock in the corporation and some stocks and bonds which consisted chiefly of investments in country banks in farming sections, the ownership of said investments being deemed advantageous in the conduct of the business, but, which upon the organization of said corporation it was not deemed necessary or advisable*1072 to transfer to the corporation. From 1910 the partnership became practically a holding partnership.
The three members of the partnership were the principal officers of the corporation and directed and were responsible for the administration of its affairs. The salaries of Simon J. Straus, Isaac D. Straus and petitioner as corporation officers were drawn from the corporation. They received no salaries from the partnership.
From time to time over a period of several years, the partnership made some other investments in banks or other companies and the money which was advanced by the corporation for such purposes was charged to the partnership on the books of the corporation and credited on the partnership books to the corporation. Likewise from time to time the corporation collected income belonging to the partnership which was credited to the latter on the corporation's books. Interest was charged by each at the rate of 5% annually on the balances owed by the other.
Since the organization of the corporation and during 1924 and 1925 it acted as fiscal agent for the partnership and collected cash for it and paid out all money on behalf of the partnership, crediting and charging*1073 same respectively on the partnership account on its books. Said corporation would collect rents and dividends and interest on stocks, bonds and notes owned by the partnership and was debited on the partnership books with said amounts, as well as rents collected on partnership real estate. Said partnership books would in turn credit the corporation with cash drawn from the corporation by the partners, interest on balance of account with the corporation, money advanced by the corporation to pay for investments purchased by the partnership and taxes paid by the corporation for the partnership.
On May 28, 1924, the outstanding common capital stock of The Straus Brothers Company corporation consisted of 10,290 shares. Said stock was the only voting stock and on said date was owned as follows: Simon J. Straus, 1 share; Abe Ackerman, 1 share; James I. D. Straus, 1 share; Straus Brothers and Company, a co-partnership, 10,216 shares; Jonas Schloss, 1 share; Harry Murphy, 50 shares; and M. G. Cass, 20 shares. On May 28, 1924 a duly called special meeting was held by the stockholders of the said corporation, the portion of the minutes of said meeting material to this case reading as follows:
*1074 STOCKHOLDERS' MEETING OF MAY 28, 1924
The Secretary laid before the meeting the draft of a contract prepared to be executed between this corporation and Straus Brothers & Company, a co-partnership, which draft is as follows, to-wit:
*415 "This agreement made and entered into in duplicate this day of May 1924, by and between Straus Brothers & Company, a co-partnership hereinafter for convenience called the "Co-partnership," party of the first part, and The Straus Brothers Company, an Indiana corporation hereinafter for convenience called the "Corporation," party of the second part, witnesseth:
"The Co-partnership now owns stocks, bonds, notes, mortgages and other securities of the book value of $344,299.50 and is indebted to the corporation upon open account in the sum of $191,290.12, and the co-partnership also owns certain stock in the corporation.
"The corporation is and for many years has been engaged in buying, selling and dealing in real estate, stocks, bonds and other securites.
"It is desired by the parties hereto that the corporation purchase, take over, own and hold all of the assets of the co-partnership excepting only the capital stock of the corporation*1075 owned by the co-partnership which shall be retained by it, and that the indebtedness due from the co-partnership to the corporation shall be cancelled, released and discharged.
"The premises considered, it is agreed by the parties hereto as follows, to-wit:
"1. The co-partnership shall and does hereby sell, assign, transfer and set over to the corporation all of its assets and property of every kind and nature whatsoever and wheresoever situated, save and except only the capital stock in the corporation owned and held by the co-partnership as aforesaid, for the price and sum of $324,299.50 and the co-partnership agrees when and if requested so to do by the corporation to execute to it such further assignments, transfers or papers writing as may be necessary or convenient to assure unto the corporation a good and indefeasible title to any of the property so transferred and sold unto the corporation as aforesaid. It is agreed, however, that this instrument shall operate as a present assignment, conveyance and transfer by the co-partnership to the corporation of all of the assets and property of the co-partnership so to be assigned and transferred to the corporation as aforesaid.
*1076 "2. The corporation agrees that it will pay to the co-partnership for the assets transferred to it as aforesaid the sum of $324,299.50 as follows, to wit:
"$191,290.12; by applying the same in satisfaction and discharge of the amount due from the co-partnership to the corporation as aforesaid; and that it will credit the balance of said purchase price, to wit: $133,099.38 [sic] to the co-partnership upon the books of the corporation; and the corporation promises and agrees to pay the same to the co-partnership or its assigns on or before five years from this date, with interest thereon at the rate of six per centum per annum from the date hereof without relief from valuation or appraisement laws and with attorneys fees; and in consideration of the transfer of the assets from the co-partnership to the corporation so to be transferred as aforesaid, the corporation shall and does hereby release, discharge and forever acquit the co-partnership and each and every member thereof from any and all liability to it of any kind or nature whatsoever by reason of the indebtedness owing from the co-partnership to the corporation as hereinbefore recited."
* * *
Thereupon James I. *1077 D. Straus offered the following resolution and moved the adoption thereof:
*416 "Whereas this corporation has agreed with Straus Brothers and Company, a co-partnership, to purchase, acquire and take over the assets and property of said Co-partnership for the price and upon the terms set forth in the draft of the contract between this corporation and said Co-partnership, which has just been submitted.
"Therefore, Be it resolved that this corporation do acquire, purchase and take over the assets and property of said Straus Brothers and Company (except only the stock in this corporation owned by said Co-partnership) for the price and upon the terms set forth in the draft of the contract hereinbefore referred to and that the said draft of said contract be approved and that the directors and officers of this corporation be directed and authorized and empowered to purchase all the assets and property of said Straus Brothers and Company (except and save only the stock in this corporation owned by said Straus Brothers and Company) for the price and upon the terms set forth in said draft of said contract and that said directors and officers be authorized and empowered to execute*1078 said contract with said co-partnership."
This resolution was adopted.
* * * NOW, THEREFORE, that the draft of said contract set out in the minutes of the Stockholders' Meeting held on this day be approved and that this corporation do purchase and acquire all of the assets and property of that co-partnership (save and except only the stock in this corporation owned by said co-partnership) for the price and upon the terms set out in said contract and that upon the transfer of said assets and property to this corporation, this corporation do release, discharge and forever acquit said co-partnership and each and every member thereof from any and all liability upon the indebtedness now owing this corporation from said co-partnership.
"BE IT FURTHER RESOLVED that the President and Secretary of this corporation be and they are hereby authorized, empowered and directed to execute said contract with said copartnership in the name of and for and on behalf of this corporation."
* * *
The assets referred to in said minutes and which were transferred by the partnership to the corporation in pursuance of the contract ratified by said minutes as well as the other assets transferred by*1079 the partnership to the corporation in 1924, were recorded on the partnership and corporation records as follows:
The records show that assets having a book value of $397,350.22 were transferred to the corporation during 1924. Of this amount, $10,215.00 represented assets transferred at cost with no profit to the partnership, the remaining $387,135.22 represented assets which cost $236,310.42. The $397,350.22 of assets were transferred at different times. First in February, 1924 the La Valencia Apartments were transferred at $72,584.72 which amount was credited to the partnership on the corporation books. Another amount represented $1,050.00 of E. G. Shiner Co. was transferred at various times and likewise credited to the partnership account. The balance of $323,715.50 representing a group of stocks, was transferred on the partnership books on Dec. 31, 1924. Immediately before this last transfer, the partnership owed the corporation $195,768.16. Upon the transfer of these assets the amount of $323,715.50 at which these assets were transferred, was credited to the partnership book account showing *417 said indebtedness to the corporation at $195,768.16, thereby changing*1080 this credit balance to a debit balance of $127,947.34 on the books of the partnership.
Both the partnership and the petitioner for 1924 and 1925, as well as for prior years, kept their books on the accrual basis. The corporation and the partnership maintained separate sets of books. The balance sheet of the corporation at December 31, 1924, shows outstanding common stock of $1,029.000 and preferred stock of $617,500.00 and a surplus of $2,844,833.20. The balance sheet at December 31, 1923 showed the same common stock outstanding, $418,000 of preferred stock and a surplus of $3,043,958.82.
The Commissioner of Internal Revenue has determined that said partnership received the sum of $387,135.22 for the assets transferred to the corporation and referred to in the minutes of stockholders and directors meetings hereto attached. The Commissioner of Internal Revenue has determined that said partnership realized a profit of $150,824.80 on the transfer of said assets and that $50,274.93 thereof is profit and taxable income to petitioner for 1924.
On June 8, 1928 said partnership Straus Brothers and Company through one of its partners, the petitioner requested the Commissioner of*1081 Internal Revenue to consolidate the accounts of the partnership and said corporation The Straus Brothers Company, for 1924 and 1925. Said request stated:
"that, in order to avoid an undue hardship the Commissioner of Internal Revenue is hereby requested to consolidate the accounts of the related businesses of Straus Brothers and Company (co-partnership) and The Straus Brothers Company, corporation, for the purpose of computing the tax liability thereof.
"That, this application is made under the provisions of Section 240(d) of the Revenue Act of 1924."
During the year 1925 the partnership Straus Brothers and Company sold stock of The Straus Brothers Company to Jay Rich at a price $1,370.00 in excess of cost to it. The Commissioner of Internal Revenue has included one-third of said $1,370.00 in petitioner's taxable net income for the year 1925.
The following facts were established by evidence in addition to the stipulation.
No charge was made during 1924 and 1925 by the corporation to the partnership for the services of any department of the corporation, either accounting or legal, and no charge was made for rental or office space, or for light, heat, salaries or legal*1082 fees. The corporation did the work of the partnership during 1924 and 1925 and no charge was made to the partnership.
On November 24, 1919, the partnership purchased 700 shares of the common stock of the corporation from one Frank R. Smith for $212,205.
At least one reason for the transfer of assets by the partnership to the corporation in 1924 was because the corporation was in need of additional assets. Prior to said transfer the partnership was indebted to the corporation and the banks were insisting that the indebtedness be liquidated or cleared up, and there was no way by which the partnership could pay except by a transfer of assets. The stocks were transferred to the corporation at the values at which they *418 were then carried on the books of the partnership. No effort was made to ascertain the actual market value of the assets at the time of transfer to the corporation. Prior to 1923 and 1924 the stocks owned by the partnership which had a "street" market were written up or down on the books according to the market value, and other stocks were written up to reflect actual values based on the best judgment of the partners, but not in every instance written*1083 down, when values fell, to reflect accurately actual values.
On April 30, 1926, the corporation was indebted to the partnership in the sum of $172,443.48, and on April 30, 1927, that amount was reduced to $72,076.36 by adjusting debits and credits, including the transfer of the Abe Ackerman withdrawal account in the amount of $108,608.58. This balance of $72,076.36 was credited to the capital investment of the partnership, and the partners in turn donated it to the surplus of the corporation.
On April 30, 1927, the petitioner donated to the surplus of the corporation the total amount of $160,192.16, which included $108,608.58 representing the petitioner's special withdrawal account. This withdrawal account, representing the sum owing by the partnership to the petitioner, was transferred to the books of the corporation and appeared as a credit to the corporation on December 31, 1924. It was part of the entries reflecting the transfer of assets to the corporation by the partnership on the last mentioned date. On April 30, 1926, the entry was canceled and the item transferred back to the books of the partnership and remained there until April 30, 1927, when it was again transferred*1084 to the corporation and the amount donated by the petitioner to the surplus of the corporation.
OPINION.
TRAMMELL: The petitioner contends, first, that in determining the deficiencies for both taxable years here involved, the respondent erred in refusing to grant the petitioner's request for a consolidation of the accounts of the partnership and of the corporation pursuant to the provisions of section 240(d) and 240(f) of the Revenue Acts of 1924 and 1926. These statutes are identical in form, and read as follows:
In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.
*419 The petitioner urges that if the accounts of the two businesses in question were consolidated for the taxable years, the transfer of assets from*1085 the partnership to the corporation in 1924 would be eliminated as an intercompany transaction, resulting in no taxable gain to the partnership and no deficiency on that account in petitioner's tax for that year; and that likewise there would be no deficiency in petitioner's tax for 1925 if the accounts were consolidated, because, it is argued, in such event the gain determined by the respondent as derived by the partnership from the sale of the corporation's stock would be eliminated as a nontaxable capital transaction.
Without deciding the correctness of the petitioner's arguments respecting the results which would flow from a consolidation of accounts, it is sufficient to point out that he has failed in the matter of proof on two essential points to bring his case within the statutes relied upon. The evidence adduced by the petitioner shows only that the corporation furnished office space rent-free to the petitioner, and also supplied heat, light, clerical, legal and other services to the partnership without charge, but no attempt was made to show the reasonable value of such services rendered in the taxable years - whether merely of nominal or material amount - and no proof*1086 offered to show the necessity otherwise for consolidation of the accounts "in order to make an accurate distribution or apportionment" of the income and expenses of the alleged related businesses.
No reason is assigned or proof offered to show that any portion of the taxable income determined by the respondent should be distributed or apportioned to the corporation, and, since the evidence before us relating to expenses affords no basis for a distribution or apportionment of those items, the respondent's action in refusing the petitioner's request for a consolidation of the accounts will not be disturbed. Roessler & Hasslacher Chemical Co.,25 B.T.A. 915">25 B.T.A. 915; Western Hide & Fur Co.,26 B.T.A. 354">26 B.T.A. 354. This being the only error alleged in respect to the year 1925, the deficiency determined by the respondent for that year is approved.
It is not necessary for us to decide whether, if the accounts were consolidated, it would result in the elimination of taxable gain as distinguished from "an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses."
The transaction whereby*1087 the assets of the partnership were transferred to the corporation took the form of a sale of assets to the corporation. The minutes of the stockholders' meeting and the minutes of the directors' meeting referred to the sale of assets by the partnership and the purchase of assets by the corporation. The *420 stipulation of facts states that the assets referred to in the minutes which were transferred by the partnership to the corporation in pursuance of a contract ratified in the minutes were transferred in pursuance of the contract.
The contention of the petitioner is that the form of the transaction should be disregarded and that the substance should be considered in determining the tax liability. The respondent contends that the terms of the written instrument, that is, the contract of sale, should not be disregarded and that the parties should be bound by their written instrument. Considering, for the sake of argument, that oral testimony might be considered to show what the actual transaction was, even to the extent of varying the terms of the written contract, see *1088 J. W. Solof,1 B.T.A. 776">1 B.T.A. 776, Rubay Co.,9 B.T.A. 133">9 B.T.A. 133, James J. O'Toole,12 B.T.A. 769">12 B.T.A. 769, Stockyards Bank of Cincinnati,25 B.T.A. 964">25 B.T.A. 964, the facts in this case, based on oral testimony, do not indicate that the transaction was other than what it purported to be, that is, a sale by the partnership. The actions of the parties, on the other hand, affirmatively indicate that all parties to the transaction considered it a sale.
To the extent of $195,768.16, the purchase price was offset by indebtedness due by the partnership to the corporation and the balance of $127,947.34 was set up on the books of the corporation as an indebtedness to the partnership and was set up on the books of the partnership as an account receivable due from the corporation. After 1924 there were various debits and credits on the books of the corporation and the partnership. At one time, at the end of 1924, the indebtedness due from the corporation to the partnership was $57,162.95. This indebtedness was later increased and decreased in various amounts. On April 30, 1926, the corporation was indebted to the partnership in the sum of $172,443.48. *1089 On May 1, 1927, the amount of the corporation indebtedness to the partnership at that time being $72,076.36, the petitioner received credit for one-third of that amount and at that time the amounts credited to the partners were donated by them to the surplus of the corporation.
Interest was allowed on the credit balance due by the corporation to the partnership.
From the foregoing facts, it may well be that the corporation actually paid the amount of $127,947.34 which was credited to the partnership by the corporation when the assets were transferred to the corporation at the end of 1924. In any event, the subsequent transactions indicate a recognition by both the corporation and the partnership of indebtedness for the assets acquired by the corporation. The partnership, which was on the accrual basis, treated the indebtedness as a valid account receivable. If the excess value of *421 assets over the indebtedness of the partnership had been an actual contribution to surplus, there would have been no account to be used for subsequent credits and debits and no occasion to charge interest thereon. The question also arises as to why the partnership contributed to the*1090 surplus in 1927 the balance due by the corporation if the assets were contributed in 1924.
The petitioner contends, and one witness testified, that it was the intention of the partnership to contributed all of the above mentioned assets to the corporation. The fact is, however, that since consideration was undoubtedly paid in the form of offsetting liabilities, at least to the extent of the liabilities owing by the partnership to the corporation, there was a valid consideration and the transfer amounted to a sale.
As to the excess of the amount stated to be the purchase price of the assets over the amount of the indebtedness of the partnership as being paid-in surplus, the evidence indicates that there was but one transaction in so far as assets to the extent of the amount of $323,715.50 are concerned. These are the only assets over which there is controversy in this case.
Even looking through form to the substance of the transaction, it is difficult to see how the one single transaction could be divided into two factors, that is, one a sale of the assets to the extent of $195,768.16, and another a contribution of assets to the extent of the difference; that is, to the extent*1091 of $127,947.34, especially in view of the facts of this case. We think, however, that the testimony is inconsistent with this theory of the case. Aside from the written instruments, consisting of the contract, minutes of the directors' meetings, and minutes of the stockholders' meetings, which the stipulation of facts states were carried out, the evidence convinces us that there was a valid consideration for the assets in the form of an account receivable in addition to the satisfaction of the indebtedness due the partnership and that this account receivable was credited with various amounts.
We think, therefore, that there was a sale of assets from the partnership to the corporation giving rise to a taxable gain. The assets which were transferred to the corporation cost $236,310.42. Included in those assets, however, there were the Valencia Apartments which were transferred at a price of $72,584.72, which counsel for the petitioner concedes in his opening statement was at a price of $20,000 in excess of cost and which amount was credited to the partnership on the corporation's books. This would leave the assets which were transferred at a value of $323,715.50 to be reduced*1092 by the amount of the cost of the Valencia Apartments, $52,584.72, and the cost should also be reduced by the amount of $1,050 representing *422 assets which were transferred by the partnership and that amount credited to the partnership account.
The respondent has determined that the partnership received the sum of $387,135.22 for the assets transferred to the corporation and that the partnership realized a profit of $150,824.80 and that the petitioner herein received $50,274.93 thereof. The $387,135.22 valuation of assets includes the Valencia Apartments which were transferred as aforesaid in a separate transaction. From the admission of counsel that these apartments were transferred at a price of $20,000 in excess of cost, whether they are in a separate transaction or not is immaterial. Considering the transactions separately, this $20,000 profit is subject to tax and the cost of assets transferred should be reduced to the extent of the cost of these apartments, but if the transfer of the assets from the partnership to the corporation, including the Valencia Apartments earlier in the year, is considered as one transaction, then the cost of assets would be $236,310.42*1093 and the $72,584.72 should be added to the selling price. For the purpose of computing taxable gain for the year 1924 the same result is reached on either theory.
There is some testimony in the record that the value of the assets transferred by the partnership to the corporation was considerably less than the figures at which they were transferred on the books. However, since it appears that the corporation received them at the agreed price representing book value, and from the evidence it appears that from the offsetting book entries, credits and debits, the assets were paid for, or were to be paid for, on the basis of book values, we do not feel inclined to disturb the determination of the Commissioner as to the selling price. The evidence discloses that the only thing which was contributed to the corporation by the partnership was the balance of $72,076.36 in May, 1927, and the partnership received gain before they made their contribution to the corporation. We do not agree with the taxpayer that all of the assets were contributed to the surplus of the corporation.
With respect to the year 1925, the partnership, according to the stipulation, sold stock of the Straus Brothers*1094 Company to J. Rich for $1,370 in excess of cost to it. The respondent has included one-third of this said amount in petitioner's taxable income for 1925. We see no error in so doing. The petitioner contended that this was an intercompany capital transaction. There is no intercompany transaction involved in this proceeding.
Reviewed by the Board.
Judgment will be entered under Rule 50.