1928 BTA LEXIS 4031">*4031 EXCHANGE OF PROPERTY FOR STOCK. - Petitioner in 1919 transferred a mixed aggregate of real and personal property and cash to a corporation which he had caused to be organized and received in exchange for such property and cash shares of stock in the corporation. Held, that the fair market value of the shares of stock received was not in excess of the value of the property and cash exchanged.
10 B.T.A. 844">*844 In this proceeding the petitioner seeks a redetermination of his income tax liability for the year 1919 for which the Commissioner has determined a deficiency of $33,766.94. The petitioner alleges error on the part of the Commissioner (1) in computing a profit on the transaction whereby the petitioner exchanged certain real and personal properties for stock in the Bankers' Land and Investment 10 B.T.A. 844">*845 Corporation, and (2) in computing a profit of $3,000 on the exchange by the petitioner of stock in the corporation for real estate valued at $12,000.
FINDINGS OF FACT.
During the year 1919 and for some years prior thereto, 1928 BTA LEXIS 4031">*4032 petitioner was and had been a real estate operator in Detroit, Mich. He had acquired a large quantity of real estate and contracts, equipment, maps, plans, specifications, listings, prospects, etc., of which he was the owner on May 6, 1919. Some of this property had been acquired prior to 1919 and some of it since that date. The Commissioner has determined that the March 1, 1913, value of properties acquired prior thereto and the cost of properties acquired thereafter and on May 6, 1919, conveyed to the corporation hereinafter described, aggregated the amount of $456,653.14 and the petitioner has accepted that valuation. On May 6, 1919, he, together with other persons, incorporated under the laws of the State of Michigan the Bankers' Land and Investment Corporation, with an authorized capital of $1,000,000 par value of common stock. On the same day the petitioner conveyed to this corporation the real estate and personal properties above referred to and $5,000 cash in consideration of the issuance of $605,000 par value of capital stock, of which amount $563,700 was issued in his name. The petitioner actually was entitled to only $523,700 of this amount under the arrangement between1928 BTA LEXIS 4031">*4033 the parties, and accordingly endorsed $40,000 par value of stock back to the corporation.
The corporation was organized for the purpose of engaging in the purchase, development and sale of real estate. At the time of incorporation conditions seemed favorable for operations of this character. The demand for houses was so great that the Mayor of Detroit urged activity in their construction. The directors of the corporation therefore decided to build low priced houses in large numbers in order to relieve the shortage. The real estate owned by the corporation was for the most part located in the suburbs of Detroit on desirable highways. Several men of standing in Detroit took part in the organization and received stock therein on account of their influence and services; among these were Richard Cudmore, vice president of the Peoples' State Bank, Clarence Wilcox, an attorney for Ford Motor Co., and Leslie R. Robinson of the legal department of General Motors Co.
On June 5, 1919, the corporation secured permission to offer for sale $395,000 par value of its capital stock and by the end of the year $151,640 par value of stock was sold at par.
After receiving permission to sell1928 BTA LEXIS 4031">*4034 the $395,000 par value of stock, an effort was made to have a group of brokers advance money on this 10 B.T.A. 844">*846 stock, but the effort was unsuccessful since the brokers would not undertake the project for the 15 per cent authorized by the securities commission, and the $40,000 bonus stock, but asked for $120,000. Thereupon the corporation decided to make the stock sale themselves and organized a sales force for that purpose. At first a 12 per cent commission was paid on sales but some 45 days later this was increased to 15 per cent. On May 15, 1919, the par value of one share of stock was changed from $100 to $10 in order to more easily dispose of it. Great difficulties were encountered in selling stock in spite of an intensive advertising campaign and additional prizes offered the salesmen. The stock sold during 1919 was mostly in small lots to so-called middle class people, such as workingmen and shopkeepers. It was sold on an average in lots of 20 to 30 shares to an individual, and on a basis of small down payments where larger payments could not be secured. Of the $151,640 par value of stock sold in 1919, $25,347.11 was still not paid for at the close of the year.
The1928 BTA LEXIS 4031">*4035 fair market value of the stock received by the petitioner was not in excess of $456,653.14, the cost or March 1, 1913, value of the assets transferred by the petitioner to the corporation.
During 1919 the petitioner exchanged $11,000 par value of stock in the Bankers' Land and Investment Corporation for a certain interest in real estate owned by J. O. Curwood, which the petitioner valued at $12,000, and reported a gain of $3,000 in his income-tax return for the year 1919.
OPINION.
TRUSSELL: When the organization of the corporation herein described was completed on May 6, 1919, the corporation had outstanding 6,650 shares of stock of a par value of $100 each. Of this total stock issued the petitioner had received 5,237 shares. The total assets received by the corporation had a value of $456,653.14 of real and personal properties plus $5,000 in cash. Based upon the value of the corporation's assets, its outstanding capital stock had a value of approximately 82 cents per $1 of par, and 82 cents per $1 of par for the 5,237 shares received by petitioner is less than the agreed value of the property and cash paid in by petitioner.
Shortly after the completion of the corporation1928 BTA LEXIS 4031">*4036 it undertook to sell to the public $395,000 par of its stock and negotiated with brokers for such a sale. The brokers offered to undertake the proposition provided the corporation would allow them a discount of 15 per cent on the par value of the stock plus $120,000 par value of stock. This proposition was not accepted by the corporation but it is significant in that the brokers estimated that it would cost $179,250 to sell $515,000 par value of the corporation's stock. This would 10 B.T.A. 844">*847 indicate the market value of approximately 65 cents per $1 of par. Thereafter the corporation undertook to organize a selling campaign of its own and organized a force of salesmen to whom it allowed, first, 12 per cent, and, after 45 days, 15 per cent commission on sales, while the corporation itself assumed the cost of an intensive advertising campaign together with the cost of special prizes to the salesmen, and during the balance of the years 1919 and 1920 was able to dispose of less than $200,000 par value of its stock in small quantities of from 10 to 30 shares of a par value of $10, which was sold on the installment plan to working men, small shopkeepers, and people to whom the corporation1928 BTA LEXIS 4031">*4037 anticipated selling its houses when built.
In , we have held that sales of small lots of stock under conditions entirely similar to the present case do not establish a market value for the large quantity of stock not offered for sale, and this whole record seems to indicate that there was practically no market for the stock under consideration and convinces us that the stock received by the petitioner in exchange for his real and personal property and cash had no greater value than the property exchanged.
Respecting the transaction from which petitioner reported gain of $3,000 as set forth in the findings of fact, the testimony concerning the value of the property acquired and the amount of stock exchanged is too indefinite and uncertain in character to warrant us in finding that the gain reported by the petitioner was other than the $3,000 originally estimated by him.
The deficiency should be recomputed in accordance with the foregoing findings of fact and opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.