*1855 1. GAIN OR LOSS - BASIS. - In 1923 the petitioner purchased certain partnership assets for cash and less than 80 per cent of its stock. Held that the transferors, the partners, were not in control immediately after the transfer within the meaning of section 202(c)(3) of the Revenue Act of 1921 and section 203(b)(4) of the Revenue Act of 1926 and that section 204(a)(8) of the Revenue Act of 1926, as to the basis for gain or loss, does not apply. Held, further, that this petitioner's gain or loss on assets sold in 1926 should be computed on the basis of cost of the assets to it in 1923, diminished by depreciation from that date.
2. DEPRECIATION. - Held that allowable depreciation for 1926 should be computed on the basis of the cost of the assets to this petitioner.
*390 The respondent has determined a deficiency in the amount of $2,285.87 in this petitioner's income tax for the calendar year 1926. Practically all of that amount is in controversy.
The petitioner assigns the following errors in the respondent's determined resulting in*1856 the deficiency:
1. The use of cost to the transferors, instead of the actual cost to the petitioner, as the basis for determining the gain or loss on the sale of real estate, thus determining a gain, whereas petitioner claimed a loss.
2. The use of cost to the transferors, instead of the actual cost to the petitioner, as the basis for computing depreciation on machinery and equipment, thus allowing a smaller amount than that claimed by petitioner as a deduction.
*391 3. The increase of profit derived from the sale of machinery by deducting a larger amount of accumulated depreciation than that allowed to petitioner since its acquisition of said machinery.
FINDINGS OF FACT.
For several years prior to and during 1923, Lewis Needles and Etta Needles, as partners, conducted a shirt-manufacturing business under the name of L. Needles Brooker Co. Lewis Needles had a two-thirds interest and Etta Needles, his wife, had one-third interest in the partnership.
On April 1, 1923, the petitioner, the L. Needles Brooker Co., was incorporated under the laws of the Commonwealth of Pennsylvania, with an authorized capital stock of $5,000, divided into 50 shares of the par*1857 value of $100 each, which were issued in June, 1923, 48 shares to Lewis Needles; 1 share to Max H. Raab, and 1 share to Elias Diamond. In August, 1923, the authorized capital stock of the petitioner was increased to $500,000, divided into 5,000 shares of the par value of $100 each. In September, 1923, the petitioner sold to eight persons employed by the partnership, a total of 1,420 shares of stock, for which petitioner received $142,000 in cash. At about the same time the petitioner purchased the said partnership's assets and assumed its liabilities for a consideration of $142,000 in cash and 3,530 shares of petitioner's capital stock. That cash and stock were paid to Lewis and Etta Needles in amounts equal to their respective interests in the partnership. Immediately after the partnership assets were transferred to petitioner, Lewis and Etta Needles owned approximately 70 per cent of the petitioner's outstanding capital stock. For the taxable year 1923, Lewis and Etta Needles recognized the gain on said transaction and reported the same on their individual income-tax returns for that year.
The partnership assets and liabilities transferred to the petitioner were as follows: *1858
| Current assets | $597,351.21 | |
| Invested assets | 60,000.00 | |
| Fixed assets - | ||
| Land | $10,000.00 | |
| Buildings | 75,000.00 | |
| Improvements | 38,149.79 | |
| Machinery and equipment | 38,186.09 | |
| 161,335.88 | ||
| Prepaid expenses | 2,765.77 | |
| Total assets | 821,452.86 | |
| Current liabilities | 326,452.86 | |
| Net assets | 495,000.00 |
*392 The assets so purchased by petitioner were set up on its books in the above stated amounts and in making its return for the year 1926, the petitioner used its book figures representing the cost of the said assets to it, as the basis for depreciation subsequent to 1923, and also as the basis for determining the gain or loss on the real estate, machinery, and equipment sold in 1926.
With the exception of an item of $121.43 disallowed as a deduction and not in controversy, the deficiency results from the respondent's determination that the basis for computing depreciation and gain or loss as to this petitioner is the same as it would be if the property had remained in the hands of the transferors. In determining the gain derived from the sale of assets in 1926 the respondent used the cost to the partners as the basis and reduced that figure by*1859 the accumulated depreciation since the date of acquisition by the partners.
OPINION.
TRUSSELL: The respondent's contention is that immediately after the transfer of the partnership assets to the petitioner, Lewis and Etta Needles were in control of the petitioner corporation; that pursuant to the provisions of section 202(c)(3) of the Revenue Act of 1921, no gain or loss should have been recognized to them (the transferors) upon such transfer in 1923; that pursuant to the provisions of section 204(a)(8) of the Revenue Act of 1926, the basis for determining gain or loss "shall be the same as it would be in the hands of the transferor," that is, the cost to Lewis and Etta Needles; and, further, that in computing gain or loss such basis should be reduced by the accumulated depreciation from the date of acquisition by the partnership to the date of sale in 1926. The respondent also contends that the allowable deduction for depreciation for the year 1926 should be computed upon the same basis, that is, cost of the assets to the partnership.
The petitioner's contention is that after the transfer of the partnership assets to the petitioner in 1923, Lewis and Etta Needles were not*1860 in control of the corporation within the provisions of section 202(c)(3) of the Revenue Act of 1921, and that the basis for computing gain or loss and also depreciation is the actual cost of the said assets to the petitioner in 1923.
The Revenue Act of 1921 provides:
SEC. 202. (c) 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; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -
* * *
(3) *393 When (A) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property, before such transfer. For the purposes of this paragraph, a person is, or two or more*1861 persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
Clearly, the above quoted section is not applicable to the facts in the case at bar, for the testimony establishes that in 1923 petitioner purchased the partnership assets for $142,000 in cash and 3,530 shares of its capital stock and that immediately after the transfer the transferors, Lewis and Etta Needles, were not in control of the petitioner within the meaning of the said section, for they received and held less than 80 per cent of the petitioner's stock. The provisions of section 203(b)(4) of the Revenue Act of 1926, while not identical as to the language employed, are the same for all intents and purposes as those of the above quoted section 202(c)(3) of the 1921 Act and are not applicable to the case at bar. Accordingly, this petitioner's gain or loss on the assets sold in 1926 may not be properly determined upon the basis provided for by section 204(a)(8) of the Revenue Act of 1926, that is, upon the basis of the cost of the assets to the transferors less accumulated*1862 depreciation from the date of acquisition by the transferors.
In our opinion the facts of record bring this case within the following provisions of section 204(a) of the Revenue Act of 1926:
SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *
The gain derived or the loss sustained by this petitioner upon the assets sold in 1926, should be determined upon the basis of the cost of such assets to it in 1923, and that basis should be adjusted, that is, diminished pursuant to section 202 of the Revenue Act of 1926, by depreciation allowed since acquisition by this petitioner.
Section 204(c) of the Revenue Act of 1926 provides:
The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, * * *
Accordingly, the allowable deduction for 1926 for depreciation upon petitioner's fixed assets should be computed upon the basis of the cost of*1863 such assets to this petitioner.
Judgment will be entered pursuant to Rule 50.