*92 Decision will be entered under Rule 50.
Petitioner was incorporated to develop, as a residential subdivision, a tract of land situated on the outskirts of Tucson, Arizona. One hundred persons contributed $ 5,000 each to form the petitioner and received therefor three $ 1,000 debenture bonds of petitioner and 20 shares of its common stock of a par value of $ 100 each. As a part of the plan for development, petitioner donated one-half of the tract to a nonprofit country club and loaned it $ 250,000 to build a golf course thereon. Petitioner sold certain lots in the subdivision and in part payment therefor accepted some of the bonds and stock it had issued. Held, that in accepting the bonds and stock in part payment of lots, petitioner was dealing in those securities as it would in the securities of another, and that such acceptance did not constitute a partial liquidation of the petitioner. Held, further, that the cost of the land donated to the country club is to be treated as part of the cost of lots sold by petitioner. Held, further, that since the loan of $ 250,000 to the country club was not forgiven until after the close of the taxable year no part of that*93 amount constituted cost of the lots sold during the taxable year.
*1283 The respondent determined a deficiency in petitioner's income tax for 1948 in the amount of $ 55,350.07. The issues for determination are the correctness of the respondent's action (1) in determining that petitioner made taxable sales of subdivision lots in the ordinary course of business, and (2) in determining that the cost of land transferred to the Tucson Country Club and money loaned to the Tucson Country Club to construct a golf course should not be included in the cost basis of the lots sold.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found*94 accordingly.
The petitioner filed its income tax return for 1948, prepared on the accrual basis, with the collector for the district of Arizona.
In 1945, the Tucson Realty and Trust Company, which was active in the real estate brokerage business in Tucson, Arizona, through its officers and salesmen, conceived the idea of organizing a corporation to acquire a 681-acre parcel of land, called Rancho De La Sombra, located between the Rillito Creek and Pantano Wash in Tucson for an exclusive real estate subdivision project. The purpose of the venture was to make profits for the investors in the new corporation and commissions *1284 on the sales of the lots for the realty company. The plan and intention at the time the acquisition of the land was first discussed by the promoters was to sponsor a country club and to give the country club part of the 681-acre tract so that the remaining lots held for sale would be bounding or near a green oasis golf course located in this arid, desert-type area.
Subscriptions of $ 5,000 each to "units of capital" of the proposed corporation to be known as Country Club Estates, Inc., and to be organized under the laws of Arizona, were obtained from *95 44 individuals. After the subscriptions had been collected and deposited in the Valley National Bank in Tucson, the corporation, the petitioner herein, was formed on May 11, 1946.
The articles of incorporation provided, inter alia:
ARTICLE IV
The nature of the business proposed to be transacted by the corporation is as follows:
To engage in a general real estate development, subdivision and construction business.
To buy or otherwise acquire real estate, and to subdivide, plat and sell the same, and generally to buy, sell and deal in real and personal property of every kind and description in such manner, and upon such terms as the board of directors may determine; to act as trustee and in every kind of fiduciary capacity, and generally to do all things necessary or convenient which are incident to or connected with the general business above mentioned, which a natural person might or could do.
* * * *
ARTICLE V
The capitalization of this corporation shall be TWO HUNDRED FIFTY THOUSAND DOLLARS ($ 250,000.00), and evidenced by certificates of stock, as follows: Two Thousand Five Hundred (2,500) shares of One Hundred Dollars ($ 100.00) par value common stock. * * *
Petitioner's directors*96 met May 16, 1946, and were advised that the exclusive option held by Tucson Realty and Trust Company on the property (known as Rancho De La Sombra) expired May 20, 1946, and could not be extended, and that the listed price was $ 220,000 cash. On May 17, 1946, a formal offer of purchase was made by petitioner to Carl and Marie Reininger, owners of the ranch. On May 18, 1946, suit was filed by James Shields for specific performance of an alleged contract to purchase this same property. In December 1946, the lawsuit was decided in favor of the Reiningers. On December 31, 1946, the Reiningers delivered to petitioner a deed to the property and petitioner paid them $ 220,000.
On March 4, 1947, the Tucson Country Club was incorporated:
as a non-profit corporation, without capital stock or shares, and no part of the net income of this corporation shall inure to the benefit of any member, and no *1285 member, officer, or employee of the corporation shall receive any pecuniary profit of any kind therefrom, except reasonable compensation for services in effecting one or more of its purposes, and no dividends or pecuniary profits shall be declared or paid to any of the members of this*97 corporation.
On April 14, 1947, the petitioner entered into an agreement with the Tucson Country Club which provided, inter alia:
1. The Corporation [Country Club Estates, Inc.] agrees to convey to the Club [Tucson Country Club] approximately 300 acres of land in the northerly portion of the property owned by the Corporation, and including, in any event, the existing residence, dining pavilion, barn, and other adjacent improvements located on said property. It is understood that the exact location of the proposed golf course has not been determined and that the boundary lines of the property so to be conveyed are to be determined by the location of the golf course and the adjoining real estate subdivision. Surveys of the property shall be made as promptly as circumstances permit and when the true legal description of the property to be conveyed has been ascertained, the deed will be executed by the duly authorized officers of the Corporation, subject to the terms and conditions hereinafter set forth.
2. The Corporation agrees to loan the Club the sum of $ 250,000 for the purpose of partially financing the construction of a golf course, club house, and other recreational facilities, *98 upon the following terms and conditions:
(a) The Club shall repay said loan, without interest, on or before January 1, 1953. Any portion of the loan not paid by said date shall bear interest at the rate of four per cent (4%) per annum until paid.
(b) The Club shall create a sinking fund for the purpose of paying said loan; and agrees to deposit in said sinking fund eighty per cent (80%) of each admission or initiation fee received by the Club from the Sale of all classes of Club memberships. The funds so deposited in said sinking fund shall be paid over to the Corporation at monthly intervals and, at the time each payment is made, a full accounting of the memberships so sold to that date by the Club shall be made. Additional funds derived from sources other than the sale of memberships may be deposited in the sinking fund, by order of the Board of Directors of the Club, and, when so deposited, shall be paid over to the Corporation as part of the succeeding monthly payment.
3. The Club understands and agrees that the conveyance mentioned in Paragraph I of this Agreement is to contain certain restrictive covenants which will be hereinafter mentioned, and that the proceeds of the *99 loan mentioned in Paragraph II of this Agreement are to be advanced only upon proper evidence that said sums are being expended upon the golf course and other club facilities contemplated under this Agreement; and only such portion of said loan is to be advanced by the Corporation as is necessary to cover the actual cost of these improvements.
4. It is mutually understood by the parties that both conveyance and loan before mentioned are in consideration of the construction by the Club of a first-class country club on said property, including an eighteen-hole golf course, and adequate club house and recreational facilities. It is anticipated by the parties that the construction of said country club will enhance the value of the remaining property of the Corporation, and the Club agrees that said construction shall be commenced forthwith and completed as promptly as the availability of materials and labor permit.
5. As a further consideration for said conveyance and loan, and in order to adequately protect the interests of the Corporation, the Club agrees that until *1286 January 1, 1963, or until the loan made pursuant to this Agreement has been paid in full, whichever date or*100 event shall last occur, the Corporation, acting through its Board of Directors, shall have the right to name or approve for election a majority of the members of the Board of Directors of the Club. The Club Directors so named by the Corporation shall be selected from the charter members of the Club.
6. The conveyance to be made by the Corporation and accepted by the Club shall contain the following restrictions and conditions:
(a) The Club shall not convey or encumber all or any portion of the property described in the deed without first obtaining the written consent of the Corporation.
(b) Said property shall be used for the purpose of operating and maintaining a private country club for the benefit of its members and their guests.
(c) In the event the Club shall be adjudicated bankrupt, make an assignment for the benefit of its creditors, liquidate its assets, permit the property to be sold for taxes or as the result of the foreclosure of any lien, the imposition of which is permitted by the laws of the State of Arizona, title to said property shall forthwith revert to the Corporation and from and after the happening of any one or all of said contingencies, said property shall *101 not constitute as [sic] an asset of the Club.
The foregoing restrictions and conditions shall remain in full force and effect until the expiration of the restrictions which are to be adopted and placed of record by the Corporation affecting the subdivision which it proposes to develop on the remainder of its property.
7. This agreement by the Corporation to convey certain property to the Club and to lend the Club not to exceed $ 250,000 for the purpose of financing the construction cost of certain improvements on the Club property, is made upon the express understanding and condition that the Club will faithfully perform each and all of the agreements and covenants herein contained and by it to be performed, and in the event that the Club shall fail so to do, then title to the property described in the afore-mentioned conveyance shall revert to the Corporation, and it shall be lawful for the Corporation and its agents or representatives to take possession of said property and remove all persons therefrom, or pursue any other appropriate remedy provided by law for the enforcement of the rights hereby granted to the Corporation.
The petitioner amended its articles of incorporation*102 July 15, 1947, to increase its capitalization to $ 1,000,000, consisting of 10,000 shares of $ 100 par value common stock. It also accepted subscriptions of $ 5,000 each for an additional 56 units of its capital.
In compliance with the foregoing agreement of April 14, 1947, the petitioner executed a deed on February 27, 1948, of the property to the Tucson Country Club. The deed provided, inter alia:
This conveyance is made and accepted subject to the following restrictions and conditions:
1. The grantee shall not convey or encumber all or any portion of the above-described property without first obtaining the written consent of the grantor.
2. Said property shall be used for the purpose of operating and maintaining a private country club for the benefit of its members and their guests, and for no other purpose whatsoever.
3. In the event the grantee shall be adjudicated a bankrupt, make an assignment for the benefit of its creditors, liquidate its assets, permit the property to *1287 be sold for delinquent taxes or as the result of the foreclosure of any lien, title to the above-described property shall forthwith revert to grantor, and under no circumstances shall said *103 property constitute an asset of the grantee in any bankruptcy or insolvency proceedings.
The foregoing restrictions and conditions shall remain in full force and effect until the expiration of the restrictions which are adopted and placed of record by the grantor affecting the subdivision which it proposes to develop on the adjoining property now owned by grantor.
Of the total cost to the petitioner of the property acquired from the Reiningers $ 120,000 was properly allocable to the improvements and land transferred by petitioner to the Tucson Country Club and is sometimes hereinafter referred to as the cost of said property.
For each unit of capital subscribed for, the petitioner issued three $ 1,000, 4 per cent, 15-year registered debenture bonds and 20 shares of $ 100 par value common stock. The bonds contained a recital that petitioner promised to pay the face amount thereof on or before January 1, 1962, and to pay interest thereon at the rate of 4 per cent per annum from date of issue, payable on the 1st day of March of each year. The bonds were redeemable by petitioner on any interest date. Stock certificates and bonds were delivered to petitioner's subscribers on March 1, *104 1948. Each of the 100 subscribers also received without cost a charter membership in the Tucson Country Club, which opened on February 8, 1948. Tucson Country Club also admitted non-charter members. In addition to the 100 charter members, the Tucson Country Club had on December 31, 1948, 100 regular members, 1 junior member, 2 junior preferred members, and 30 social members.
On March 28, 1948, the petitioner offered lots for sale to its stockholders at list prices, less 15 per cent, since petitioner was to pay no commissions to its salesmen on such transactions. Original subscribers were permitted to turn in their stock and bonds to be applied at par as payment on the lots.
During 1948 the petitioner disposed of 62 lots, 60 of which were sold to its stockholders. Part or all of the consideration paid by stockholders, depending on the individual purchaser, for lots consisted of bonds and stock of petitioner. For the 62 lots sold, the petitioner received $ 179,000 par value of its bonds, $ 23,400 par value of its stock, and $ 60,960 in cash. Two lots were sold to nonstockholders for cash in the total amount of $ 7,850.
Land restrictions affecting the lots were filed on March *105 27, 1948. These restrictions contained references to the Tucson Country Club and provided that the restrictions were to expire January 1, 1990, or sooner if 75 per cent of the owners of the lots so desired.
On April 12, 1948, at a meeting of the petitioner's directors, the petitioner agreed to modify the agreement dated April 14, 1947, *1288 wherein the petitioner loaned the Tucson Country Club $ 250,000. Thereafter, on May 20, 1948, a modifying agreement was made, which provided, in part, as follows:
1. The original loan agreement dated April 14, 1947, contemplated that the $ 250,000 loan provided for by said agreement would not be sufficient to pay the entire cost of constructing and developing an eighteen-hole golf course and remodeling and equipping the buildings on the club property so as to provide adequate club facilities.
2. The cost of the work, improvements and equipment has exceeded original estimates by approximately the sum of one hundred fifty thousand dollars ($ 150,000). As a consequence the Club either has to default in its obligation to repay said loan by the application of a certain percentage of each admission fee received by the Club, or the terms of the*106 said agreement will have to be modified.
3. The Corporation recognizes that the Club has expended the proceeds of said loan in an economical and advantageous fashion, and that all of the improvements and facilities constructed by the Club are necessary and greatly enhance the value of the property owned by the Corporation adjacent to the Club property.
4. In order to permit the Club to meet its obligations (other than to the Corporation) and to proceed with its improvement program, the failure of which would be seriously detrimental to the best interests of the Corporation, Paragraph 2 (b) of the agreement dated April 14, 1947, above referred to, is hereby modified to read as follows:
"The first one hundred fifty thousand dollars ($ 150,000) received by the Club from the sale of Club memberships shall be retained by the Club and used to pay the cost of the work, improvements and equipment already incurred by the Club and to be incurred. After the sum of one hundred fifty thousand dollars ($ 150,000) has been received by the Club from the sale of memberships, but in any event not later than two years from April 12, 1948 (even though the sum of one hundred fifty thousand dollars*107 ($ 150,000) has not by that time been received from the sale of memberships by the Club) the Club shall create a sinking fund for the purpose of paying said loan; and agrees to deposit in said sinking fund eighty per cent (80%) of each admission fee received, after that date, by the Club from the sale of all classes of Club memberships. The funds so deposited in said sinking fund shall be paid over to the Corporation at monthly intervals; and at the time each payment is made a full accounting of the memberships sold to that date by the Club shall be made. Additional funds derived from sources other than the sale of memberships may be deposited to the sinking fund by order of the Board of Directors of the Club, and when so deposited shall be paid over to the Corporation as part of the succeeding monthly payment."
5. The foregoing modification of the terms of the original loan agreement, which modification amounts to a moratorium on the sinking fund payments provided by said loan agreement, is made upon the express condition that all expenditures by the Club during said two-year moratorium period, other than expenditures already contracted for or expenditures for normal operating*108 expenses of the Club, shall first be approved by the Board of Directors of the Corporation, and no such expenditures shall be made by the Club without first obtaining the written approval of the Board of Directors of the Corporation. In the event the Club fails to comply with this requirement of obtaining the *1289 written approval of the Board of Directors of the Corporation before such expenditures are made or contracted for, then the modification of said original loan agreement, as herein provided, shall be null and void, and of no further force and effect, and all sinking fund payments which would otherwise have been due from the Club to the Corporation shall become immediately due and payable.
6. Nothing contained in this supplemental agreement shall be construed as in any way relieving the Club of its obligation to repay the entire $ 250,000 loan; it being the intent of this supplemental agreement merely to modify, by moratorium, the plan of repayment set forth in the agreement of April 14, 1947.
At a special meeting of the petitioner's board of directors on November 16, 1948, a discussion was had about the financial position of the petitioner. A tentative statement was*109 presented in regard to Federal and State income tax liability resulting from the sale of lots. The statement indicated that the petitioner had a tax liability of $ 50,000 and showed that the petitioner had less than $ 4,000 cash on hand.
Prior to 1949 no action was taken by either the petitioner's directors or its stockholders respecting forgiveness of the indebtedness of $ 250,000 owing to it by the Tucson Country Club. However, on March 8, 1949, at a meeting of the petitioner's stockholders, it was decided that the Tucson Country Club would never be able to repay the loan to the petitioner and that Tucson residents were hesitant about joining the Tucson Country Club when it had such a large liability to repay. The petitioner's stockholders then decided that in order to encourage people to join the Tucson Country Club, the petitioner would forgive the loan of $ 250,000 owed by Tucson Country Club. On June 3, 1949, the stockholders adopted the following resolution previously passed by petitioner's directors at a meeting held March 13, 1949:
RESOLVED that the agreement between this Corporation and Tucson Country Club dated April 14, 1947, wherein, among other things, this Corporation*110 agreed to loan said Tucson Country Club the sum of $ 250,000 for the purpose of partially financing the construction of a golf course, Club house and other recreational facilities, be modified in the following manner, to-wit:
(1) Paragraphs 2 (a) and (b) are hereby cancelled effective December 31, 1948, and shall be of no further force and effect.
(2) The following paragraphs are substituted therefore [sic]:
paragraph 2 --
(a) The Club shall not be required to repay said cash advance provided it shall expend the moneys so advanced in the manner hereinafter prescribed and shall thereby establish a first-class Country Club including an 18-hole golf course and adequate Club House and recreational facilities of such a character as shall correspondingly enhance the value of the remaining property of the corporation.
(b) The enhancement in value of the adjoining property owned by the corporation shall be accepted by the corporation as full consideration for the moneys advanced under this agreement.
*1290 RESOLVED, further, that the foregoing modification of said agreement shall be made in consideration of Tucson Country Club as follows:
(1) Tucson Country Club shall immediately*111 raise by assessment of its members sufficient cash (approximately $ 27,000) to liquidate all of its current and past-due obligations and place itself in a liquid cash condition.
(2) Tucson Country Club shall establish at once new classes of membership, in particular a social membership, at reduced initiation fees that will enable it to build up its membership to the point where income from dues will equal or exceed its monthly overhead expenses.
(3) Tucson Country Club shall immediately increase the dues of its present members in an amount not less than $ 5.00 per month to realize sufficient income to meet its current overhead expenses.
RESOLVED, further, that the Secretary is directed to convey the contents of this resolution to the membership of Tucson Country Club, and upon their acceptance of its terms and conditions, the above-mentioned agreement of April 14, 1947, shall be considered modified as herein provided, effective December 31, 1948.
Subsequent to June 3, 1949, the Tucson Country Club accepted the terms proposed for the cancellation of its $ 250,000 indebtedness to the petitioner and shortly thereafter became able to operate without incurring losses.
In its income tax*112 return, petitioner reported sales of lots in the amount of $ 263,360, cost of lots sold at $ 205,894.46, with a gross profit on such sales of $ 57,465.54. Cost of lots sold was determined by petitioner as follows: Petitioner first determined the total selling price for all lots in the subdivision to be $ 833,050. Petitioner then determined the total selling price of all lots sold at $ 308,450. From the foregoing, the petitioner determined that the $ 308,450 represented 37.03 per cent of the $ 833,050. Petitioner then applied the foregoing percentage to $ 556,020.70, which it had estimated would be the total cost of all lots in the subdivision when completed. The resulting amount was $ 205,894.46.
Respondent eliminated from the total cost determined by the petitioner the amount of $ 250,000 which was loaned to Tucson Country Club and the amount of $ 120,000 representing the cost of the land and improvements transferred to Tucson Country Club by petitioner. This resulted in an increased profit from sales of $ 137,010.99.
OPINION.
The petitioner contends that the exchange of subdivision lots for its stock and bonds was an exchange of capital stock, which had no established market*113 value, for subdivision lots, which likewise had no established market value, and that, therefore, no recognizable taxable gain has been realized. Further, petitioner contends that, assuming a taxable gain was realized, then the exchanges *1291 were in the nature of a partial liquidation, the bonds actually being stock. Lastly, petitioner contends that if we should find that a sale occurred, then the basis for each subdivision lot should include a proportionate part of the cost of the land transferred to Tucson Country Club and the $ 250,000 which it loaned to the club to construct a golf course.
Respondent contends (1) that the petitioner handled the transactions as sales, and it cannot now change the facts to support a different legal theory; (2) that the land transferred to the Tucson Country Club was not permanently and irrevocably transferred and, therefore, must have a cost basis; (3) that the petitioner's stockholders through memberships in the Tucson Country Club received a personal benefit as distinguished from a real estate benefit running to the basis of the lots sold; and (4) that the $ 250,000 loaned to Tucson Country Club cannot be a part of the basis of the lots*114 sold in 1948 as it was not forgiven until in June 1949. Respondent also contends that if we should determine that the loan of $ 250,000 was a proper addition to the cost basis of petitioner's lots, then we should hold that the deduction of $ 16,815.39 taken by petitioner on account of interest accrued on its outstanding debenture bonds was not allowable.
The record before us shows that during 1947, 100 persons subscribed for 100 units of petitioner's capital at $ 5,000 per unit. The petitioner issued three $ 1,000 bonds and 20 shares of $ 100 par value common stock for each subscription for a unit of capital. In the light of the issuance of 2,000 shares of common stock for cash, it appears to us that petitioner's stock was worth $ 100 per share. The record also discloses that petitioner made 62 sales of its subdivision lots during 1948 at prices varying from $ 2,500 to $ 6,000 per lot. In payment for these lots, the petitioner received its previously issued bonds and stock at par value, plus varying amounts of cash, in some cases as much as $ 3,000. It also sold two lots for $ 4,350 and $ 3,500, cash, respectively. In view of these 62 sales made at amounts determined by the*115 petitioner, it appears to us that petitioner's lots had an established market value. As was said in Dorsey Co. v. Commissioner, 76 F.2d 339">76 F. 2d 339:
when in a business exchange for its real estate it receives in part its own stock it is converting by sale a previous purchase, and if what it receives has a fair market value the gain or loss realized in the exchange must be measured and taxed. * * *
We, therefore, conclude that petitioner's first contention is without merit.
Further, petitioner contends that the exchange of its stock and bonds for its lots was in the nature of a partial liquidation and should not result in taxable income to it. The petitioner cites no authority in *1292 support of this contention. In connection with this contention, petitioner also contends that the bonds should be considered as stock. One of the bonds was offered in evidence and a careful examination of it discloses nothing to indicate that it was intended to represent an investment in petitioner's capital stock. While it is true that the bonds were not secured by a mortgage, that fact alone does not establish that they were stock. The bonds recite the promise*116 of the petitioner to pay to the holder the sum of $ 1,000, on or before January 1, 1962, and to pay interest at 4 per cent per annum from date of issue, payable on the 1st day of March of each year. While not determinative of the issue, it is significant that petitioner accrued interest payable on the bonds and deducted it on its income tax return. There is no contingency in regard to the payment of either interest or principal. Cf. Northern Refrigerator Line, Inc., 1 T. C. 824. We conclude that the bondholders were creditors of petitioner and not stockholders.
We, therefore, need only decide whether the cancellation by the petitioner of the $ 23,400 par value of its stock turned in for its lots was a partial liquidation. The parties have stipulated that lots were offered to petitioner's stockholders at the prices established by petitioner and that the stockholders were permitted to turn in their original stock and bonds in payment at par for the lots. Section 115 (i) of the Internal Revenue Code of 1939 defines "amounts distributed in partial liquidation" as meaning:
a distribution by a corporation in complete cancellation or redemption of a *117 part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.
Whether the disposition of the lots was a sale or distribution in statutory liquidation is entirely factual. C. M. Menzies, Inc., 34 B. T. A. 163, 169.
The basic transaction here was the sale of lots by petitioner to its stockholders. Simply because the petitioner received its own stock in payment for lots does not change the transaction from a sale to a distribution in liquidation. A gain or loss may be realized by a corporation when it sells its assets for its own stock. 1 We have decided that *1293 the stock had value. This value is to be considered as part of the consideration received for the lot. We conclude that the corporation was dealing in its stock as if it were stock in another corporation and that this transaction was not a partial distribution. See Allyne-Zerk Co. v. Commissioner, 83 F.2d 525">83 F. 2d 525, affirming 29 B. T. A. 1194.
*118 Lastly, the petitioner contends that the cost of the property transferred to Tucson Country Club, $ 120,000, and $ 250,000 loaned to it should be added to the cost of the lots. Petitioner urges that it was organized to make a profit, that it had a definite business purpose in establishing Tucson Country Club, and that it promised the purchasers of its stock that it would establish a country club. It contends that the dedication of the land to be used as a country club is analogous to the dedication of land to be used for streets. Commissioner v. Laguna Land & W. Co., 118 F.2d 112">118 F. 2d 112.
Respondent contends the land was not irrevocably transferred to Tucson Country Club and that, based on the holding in Biscayne Bay Islands Co., 23 B. T. A. 731, some cost basis must be allocated to the land. In the Biscayne Bay case it was stated that:
[the] area [set aside for a playground for ten years] was not permanently and irrevocably dedicated to the public * * * It is unlike the area used for public streets, which is permanently beyond the possibility of sale and gain * * *
It was there decided that some cost must be allocated*119 to the playground. In the present case, the petitioner transferred the land to the club with the proviso that it was to be used for a nonprofit country club and to be kept as such and not sold by the club. The deed further provides that the land is not to be levied upon and, in the event of bankruptcy, among other contingencies, the land shall revert to the petitioner. These provisions were to be in effect as long as the land restrictions were in effect, i. e., until January 1, 1990, or, unless earlier, 75 per cent of the owners of the lots voted to waive the restrictions. We believe this situation is substantially different from that in Biscayne Bay. While the petitioner's stockholders may have received some personal benefit from joining Tucson Country Club, the basic purpose of petitioner in transferring the land was to bring about the construction of a country club so as to induce people to buy nearby lots. We, therefore, conclude that the cost of the property transferred to Tucson Country Club, $ 120,000, should be regarded as part of the basis of the lots. See Kentucky Land, Gas & Oil Co., 2 B. T. A. 838.
*1294 The situation with*120 regard to the $ 250,000 which petitioner loaned to Tucson Country Club to construct a golf course and other facilities is entirely different. While it is well established that petitioner has the right to include in its cost such estimated future expenditures for the development of the property as required by the contracts of sale, Cambria Development Co., 34 B. T. A. 1155, it has also been long recognized that income taxes are to be computed on an annual basis and on the basis of facts which the taxpayer knew or could reasonably be expected to know at the end of its taxable year. Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359; Baltimore Transfer Co., 8 T.C. 1">8 T. C. 1.
From an examination of the record before us, we find that on May 20, 1948, the petitioner made a supplemental arrangement with Tucson Country Club in regard to the repayment of the $ 250,000 loan. So far as shown, the petitioner still considered the loan to be collectible at the end of 1948 and the record affords no basis for a finding that it was otherwise. It was not until March 1949, when petitioner's stockholders decided that*121 the club would be unable to pay the loan, that a decision was reached as to the uncollectibility of the loan. In view of the foregoing, we conclude that no part of the $ 250,000 loan was includible as part of the cost of the lots sold in 1948.
In view of our above holding, it is unnecessary to consider the respondent's contention regarding the deductibility of interest on petitioner's debentures.
Decision will be entered under Rule 50.
Footnotes
1. Regs. 111, sec. 29.22(a)-15, provides:
Acquisition or Disposition by a Corporation of Its Own Capital Stock. -- Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩