*106 Decision will be entered for the respondent.
The correct basis for computing petitioner's gain or loss in the year 1944 for his 252 shares of stock of Corporation B in liquidation depends upon whether the shares, which were received by petitioner as a distribution in liquidation of Corporation A in 1941, were received by petitioner as one of a series of transactions amounting to a taxfree reorganization. Respondent determined that the transactions failed to qualify as a reorganization under the provisions of section 112 of the Code, that petitioner sustained a loss upon the liquidation of Corporation A, and the basis of petitioner's shares of Corporation B which he received in part payment of indebtedness which Corporation A owed petitioner was the fair market value of the Corporation B shares at the time they were transferred to petitioner. Held, the shares which petitioner received in Corporation B in 1941 were not received in pursuance to any plan of reorganization which started in 1934 and their cost basis to petitioner was their fair market value when transferred to petitioner in 1941. The Commissioner's determination is sustained.
*217 The Commissioner has determined a deficiency of $ 14,563.92 in petitioner's income tax for the year 1944. The deficiency is due to an adjustment*108 made by the Commissioner to the net income reported by petitioner on his return. This adjustment was "(a) Capital gain $ 28,287.84," and is explained in the deficiency notice as follows:
(a) In your individual income tax return for the calendar year 1944 you deducted $ 1,000.00 as the limitation on capital losses under section 117 (d) of the Internal Revenue Code, said capital loss being stated in the amount of $ 20,761.35, or 50 per cent of $ 41,522.69 computed as loss on liquidation of a corporation. In this connection, it is held that you realized a long-term capital gain of $ 27,287.85, in lieu of the claimed loss, computed under Code section 117, as follows:
| Consideration received | $ 77,595.59 |
| Cost of other basis for stock | 23,019.91 |
| Gain | $ 54,575.68 |
| Capital Gain, 50% | 27,287.84 |
Accordingly, your reported net income has been increased by $ 28,287.84, representing the above capital gain of $ 27,287.84 and the disallowance of the $ 1,000.00 limitation deducted by you.
By appropriate assignments of error petitioner contests the foregoing adjustment and alleges that the petitioner acquired the stock in question in a tax-free reorganization and that petitioner's basis*109 of the stock namely, 252 shares of the common stock of the F. K. Ketler Company, is the same as it was before a corporate distribution in liquidation in 1941 and that when the unadjusted basis is used, as it should be, petitioner sustained a loss in the liquidation of the corporation during the taxable year instead of a gain as the Commissioner has determined.
The only issue is whether the cost or other basis of petitioner's 1,700 shares of stock was $ 23,019.91, as determined by respondent, or $ 89,217.22, *218 as contended by petitioner. The parties have agreed that the basis of 1,448 of the 1,700 shares is $ 17,975.50.
The controversy, therefore, resolves itself around the cost basis to be used for 252 shares of F. K. Ketler Company stock. Petitioner acquired these 252 shares in a liquidation and dissolution of Monroe Construction Company in 1941 and claims a cost basis of $ 71,241.72 for them, whereas respondent has determined that these shares had a cost basis to petitioner of $ 5,044.41.
There is no issue but that the liquidation of F. K. Ketler Company in 1944 was a taxable transaction. That is, the one upon which petitioner bases his claim of a capital loss and upon*110 which respondent has determined that petitioner realized a capital gain.
FINDINGS OF FACT.
All the facts have been stipulated and we adopt them as our findings of fact. They may be summarized as follows: Petitioner is an individual and his income tax return for the calendar year 1944 was filed with the collector of internal revenue for the first district of Illinois.
F. K. Ketler Co., hereinafter referred to as Ketler Co., was an Illinois corporation and on January 3, 1944, was dissolved in accordance with the laws of that state. On that date petitioner was the owner of all the 1,700 outstanding shares of the corporation.
Respondent determined that petitioner realized upon the liquidation of Ketler Co. a long term capital gain of $ 54,575.68 of which petitioner would have to take into account 50 per cent or $ 27,287.84. Petitioner concedes that respondent correctly determined in the deficiency notice a basis of $ 17,975.50 for 1,448 of the 1,700 shares of stock of Ketler Co. The remaining 252 shares of stock were received by petitioner in 1941 in the liquidation and dissolution of the Monroe Construction Company, and respondent determined their basis to petitioner was $ 5,044.41*111 which was their book value on the date of liquidation of Monroe Construction Company (Ketler Co. #1).
Petitioner claims a basis for these 252 shares of $ 71,241.72 computed as follows:
| Notes payable (R. F. C.) | $ 15,606.90 |
| Notes payable (F. K. Ketler) | 8,570.89 |
| Accounts payable (F. K. Ketler) | 26,921.80 |
| H. Le Lacheur -- Notes payable | 1,555.14 |
| Marie Ketler -- Accounts payable | 783.46 |
| Accrued interest on notes payable | 2,803.53 |
| Capital stock | 15,000.00 |
| Total | $ 71,241.72 |
The first F. K. Ketler Co., sometimes referred to herein as Ketler Co. #1, was an Illinois corporation organized in 1923 for engaging *219 in the construction and contracting business. Petitioner was the owner, actual or constructive, of all the shares of Stock of Ketler Co. #1 throughout its existence. Capital stock of Ketler Co. # 1 was issued in the amount of $ 15,000, and this amount was outstanding at the time of its liquidation. For this stock petitioner paid $ 15,000.
During 1934 it became quite difficult, financially, for Ketler Co. #1 to operate and certain steps were taken to continue the business. In November 1934, the name of Ketler Co. #1 was changed to the Monroe Construction Co., *112 sometimes hereafter referred to as Monroe. On or about November 19, 1934, a new corporation named F. K. Ketler Co. was organized by petitioner pursuant to the laws of the State of Illinois. Throughout the existence of the new corporation petitioner owned, directly or indirectly through "dummy" incorporators or through Monroe, all its outstanding shares of common stock.
On November 20, 1934, Monroe leased its real estate, construction equipment, and other property to Ketler Co. for a period of 10 years at the rate of $ 35 per month and 50 per cent of net profits. Ketler Co. was also given an option to purchase the property during the term of the lease at a value to be determined by independent appraisers and as a part of the same agreement Monroe contracted to buy all the shares of stock of Ketler Co., 252 shares. In exchange for the shares of stock certain construction work in progress and unexpired insurance contracts were assigned to Ketler Co. and Ketler Co. received $ 1,300 in cash and $ 24,221.34 in accounts receivable. As a consequence of this transaction, Ketler Co. was engaged in the contracting business, while Monroe was engaged in the business of leasing its yard and*113 equipment to Ketler Co.
Thereafter, on January 8, 1935, Monroe through its directors instituted proceedings for a reorganization under the provisions of section 77B of the Bankruptcy Act. This reorganization, however, was not consummated and the proceeding was dismissed without prejudice.
Monroe continued to rent its properties to Ketler Co. under the terms of the lease until January 6, 1937. On that date Monroe transferred the properties to Ketler Co., receiving in exchange for the properties 1,350 shares of preferred stock of Ketler Co. with a par value of $ 13,500. Until January 6, 1937, Monroe held all the outstanding shares of stock of Ketler Co. but on that date Ketler Co. issued 1,000 shares of its common stock to petitioner for $ 100 cash.
On January 29, 1937, and on February 2, 1940, petitioner purchased for $ 10 per share the preferred stock of Ketler Co. in the amounts of 675 shares and 475 shares. In August 1941, petitioner donated to surplus of Ketler Co. the 1,150 shares of preferred stock having a book value of $ 11,500. On February 3, 1940, petitioner purchased 225 shares of common stock of Ketler Co. for $ 2,250. On August *220 11, 1940, petitioner purchased*114 223 shares of common stock of Ketler Co. for $ 4,125. The net consequence of these transactions between petitioner and Ketler Co. was that petitioner held 1,448 shares of common stock of Ketler Co., having a basis for the shares of $ 17,975.50. The basis of these 1,448 shares is not in dispute.
Monroe was dissolved pursuant to the laws of the State of Illinois on August 8, 1941. Immediately prior to dissolution the assets and liabilities of Monroe as shown by its books and records were as follows:
| Assets | |
| Common stock (F. K. Ketler Co.) | $ 25,200.00 |
| Preferred stock (F. K. Ketler Co.) | 13,500.00 |
| Total | $ 38,700.00 |
| Liabilities | |
| Notes payable (Reconstruction Finance Corp.) | $ 15,606.90 |
| Notes payable (F. K. Ketler) | 8,570.89 |
| Accounts payable (F. K. Ketler) | 26,921.80 |
| H. LeLacheur -- Notes payable | 1,555.14 |
| Marie Ketler -- Accounts payable | 783.46 |
| F. K. Ketler Co. -- Operation account | 19,441.30 |
| Accrued interest on notes payable | 2,803.53 |
| Capital stock issued and outstanding | 15,000.00 |
| Deficit | (51,983.02) |
| Total | $ 38,700.00 |
In winding up the affairs of Monroe, Ketler Co., as creditor of Monroe, agreed to cancel its indebtedness of $ 19,441.30*115 against Monroe in consideration of the transfer to it by said corporation in dissolution of 1,350 shares of its preferred stock. Petitioner personally agreed to pay off the remaining indebtedness of Monroe to other creditors. These obligations which petitioner assumed were paid subsequent to dissolution. The indebtedness of Monroe to petitioner including the indebtedness which petitioner assumed, was $ 56,241.72. At the dissolution of Monroe petitioner, as creditor and sole stockholder of the corporation, received from Monroe the 252 shares of common stock of Ketler Co. The book value of the 252 shares of common stock of Ketler Co. at the time of dissolution of Monroe was $ 5,044.41, or $ 20.0175 per share.
Monroe filed Federal corporate income tax returns separately from the Federal corporate income tax returns of Ketler Co. On Schedule D of petitioner's Federal income tax return for the taxable year a loss with respect to the liquidation of the F. K. Ketler Co. was claimed of $ 1,000 explained in its return as follows:
*221 SCHEDULE DF. K. Ketler Co., an Illinois Corporation, was dissolved as at January 3, 1944.
F. K. Ketler acquired the assets and assumed the *116 liabilities.
| His invested capital in the business at December 31, 1943 (Form | |
| 1121) was | $ 124,819.83 |
| The capital stock and surplus acquired by F. K. Ketler at December | |
| 31, 1943 (Form 1120) was | 83,297.14 |
| 41,522.69 | |
| Capital loss -- 50% | 20,761.35 |
| Limitation | $ 1,000.00 |
In determining the cost or other basis for the said 1,700 shares of common stock of F. K. Ketler Co. at $ 23,019,91, the Commissioner made his computation as follows:
| Number of | Date acquired | Cost to | ||
| shares | by taxpayer | taxpayer | ||
| 1,000 | Jan. 6, 1937 | $ 100.00 | ||
| 225 | Feb. 3, 1940 | 2,250.00 | ||
| 223 | Aug. 11, 1941 | 4,125.50 | ||
| Total cost of 1,448 shares of F. K. Ketler Co | $ 6,475.50 | |||
| On June 30, 1941 petitioner donated to F. K. Ketler Co. | ||||
| 1,150 shares of preferred stock which originally cost | ||||
| petitioner (see paragraph 10 hereof) | 11,500.00 | |||
| 252 | Aug. 8, 1941 | |||
| Basis for 252 shares of stock received when Monroe | ||||
| Construction Co. was dissolved | 5,044.41 | |||
| 1,700 | Total cost or other basis | $ 23,019.91 |
The amount of $ 77,595.59 paid petitioner in 1944 upon the complete liquidation of Ketler Co. was received by him in full payment for 1,700 shares of the dissolved*117 corporation's common stock, and petitioner realized a gain (pursuant to section 115 (c) of the Internal Revenue Code) measured by the excess of $ 77,595.59 over his basis for the stock.
Petitioner's basis for 1,448 shares of the Ketler Co. stock is equal to the total cash payments of $ 17,975.50 made by him from time to time to the corporation for stock. Petitioner's basis for the remaining 252 shares is $ 5,044.41, i. e., the fair market value of the stock on January 3, 1941, when petitioner received it from the Monroe Construction Co. in partial payment of an indebtedness.
Petitioner's gain upon the complete liquidation of F. K. Ketler Co. was the difference between $ 77,595.59 and $ 23,019.91, or $ 54,575.68. This was a capital gain and 50 per cent thereof should be taken into account, as the Commissioner has determined.
*222 OPINION.
We have found from the facts as stipulated that during the taxable year 1944 the petitioner received $ 77,595.59 as a distribution in liquidation of Ketler Co. This figure petitioner does not dispute although he claimed the figure was $ 83,297.14 on his return. At liquidation the corporation had 1,700 shares of stock outstanding and petitioner*118 was its sole stockholder. The only question to be decided in this proceeding is whether petitioner's correct basis for 252 of his shares is $ 5,044.41, as determined by respondent, or $ 71,241.72, as contended by petitioner.
Petitioner contends that respondent has misinterpreted the facts and that respondent erred in failing "to recognize and give effect to a tax-free reorganization," because the distribution in liquidation of Monroe in 1941 was but the final step in a series of transactions which when considered as a whole constitute a reorganization. Petitioner argues that as the 252 shares of stock were received in an exchange falling within the purview of section 112 of the Code, the exchange is to be excepted from the gain or loss provisions of the Code. Consequently, petitioner contends his basis for the 252 shares of stock, since the distribution in liquidation was a part of a tax-free exchange, is to be computed by adding $ 15,000, his original cost of Monroe stock, and $ 56,241.72, which was the amount which Monroe owed petitioner at the time of its liquidation including the amount of Monroe's indebtedness which petitioner assumed and agreed to pay.
Respondent contends*119 that the liquidation of Monroe in 1941 was not in pursuance of any plan of reorganization but that it was simply the ordinary liquidation of a corporation which had ceased to transact any business and is taxable in the ordinary way as the statute provides. See section 115 (c) and section 117 of the Code. Respondent contends that what happened was this: In 1941 Monroe owed considerable debts and had no assets except the 252 shares of common stock of Ketler Co. Petitioner was the only stockholder of Monroe. It was agreed to liquidate Monroe. Petitioner agreed to assume and pay the indebtedness of Monroe and this amount added to what Monroe owed him aggregated $ 56,241.72. All that petitioner received for this $ 56,241.72 was 252 shares of the common stock of Ketler Co. which had a fair market value of $ 5,044.41 at the time of liquidation. Therefore respondent says that petitioner had a loss as a creditor in 1941 upon the liquidation of Monroe and that this loss was measured by the difference between $ 56,241.72, petitioner's indebtedness including that which he had assumed, and $ 5,044.41, the fair market value of the 252 shares which he received, and that thereafter petitioner's*120 cost basis of the 252 shares of stock was $ 5,044.41.
*223 Respondent also contends that petitioner received nothing for his $ 15,000 cost basis of his stock in Monroe which was turned in at the time of liquidation and canceled and that this entire amount of $ 15,000, cost of petitioner's Monroe stock, was lost in 1941 and that petitioner cannot add it to the cost of his 252 shares of Ketler Co. stock which he received in the liquidation of Monroe. We think respondent must be sustained on the facts which have been stipulated.
Petitioner as we have already stated contends that the transactions culminating in the liquidation of Monroe in 1941 constitute a reorganization, satisfying the requirements of section 112 (g) (1) (D), as set forth in the margin. 1 Petitioner would have us make the following interpretation of the facts, in summary. Monroe of which petitioner was sole stockholder, became involved in financial difficulties during 1934. At that time petitioner organized another corporation, Ketler Co. of which he was the sole stockholder. Through a series of transactions taking place between 1934 and 1941 Monroe was reorganized, Monroe transferring its assets to Ketler*121 Co. in exchange for the latter's common stock, which was in turn transferred to petitioner in 1941 upon the liquidation of Monroe. Before the reorganization petitioner owned all the stock of Monroe and after the plan was completed petitioner owned all the stock of Ketler Co., a corporation which was a continuation of the business of Monroe. Also during the interim period petitioner personally paid certain obligations of Monroe. The distribution in liquidation of Monroe was, therefore, in reality an exchange which was a part of a reorganization, as defined by section 112 of the Code that no loss was to be recognized in 1941 by himself upon the receipt of the distribution in liquidation of Monroe.
*122 The various subsections of section 112 of the Code provide that under certain circumstances no gain or loss is to be recognized upon the sale or exchange of property. See section 112 (a) of the Code, which reads as follows:
(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
It should be kept in mind that we do not have before us the question whether in 1934 when Ketler Co. was organized and Monroe transferred to it part of its assets in exchange for 252 shares of the common stock of Ketler Co. there was an exchange under section 112 (b) (4) which reads "no gain or loss shall be recognized if a corporation a *224 party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization."
Assuming without deciding that the transaction in 1934 between Monroe and Ketler Co. was a statutory reorganization in which no gain or loss was recognized because it came within section 112 (b) (4) and 112 (g) (1) (D), nevertheless the transaction by*123 which petitioner received 252 shares of Ketler Co. stock in 1941 when it was decided to liquidate and dissolve Monroe was a gain or loss transaction to petitioner unless his receipt of the 252 shares of Monroe stock in 1941 was a part of the plan of reorganization which took place in 1934 in which Monroe and Ketler Co. were parties to the reorganization. We do not think the stipulated facts show that what took place in 1941 was a part of a reorganization plan which started in 1934. On the contrary we think the facts show that in 1941 Monroe was insolvent and owed debts which it could not pay. Petitioner, its sole stockholder and its largest creditor, decided to liquidate Monroe and dissolve it. He agreed to assume and pay its debts and received as part payment for this indebtedness plus what Monroe owed him the only property which Monroe owned, namely, 252 shares of stock in Ketler Co. He really received nothing as a stockholder of Monroe. What he received was received as a creditor of Monroe. He thereupon had a loss of the difference between the indebtedness which he held against Monroe including that which he had assumed and the fair market value of the 252 shares of Ketler*124 Co. stock which he received, this value being $ 5,044.41. This $ 5,044.41 became the cost basis of the 252 shares which he received. He also had a loss of the cost of his stock in Monroe, $ 15,000, for which he received nothing at all. See H. G. Hill Stores, Inc., 44 B. T. A. 1182 and Glenmore Distilleries Co., 47 B. T. A. 213. In the H. G. Hill Stores case we held that:
* * * Where an insolvent corporation transferred all of its assets, subject to liabilities, to its principal creditor for "a sum" and in cancellation of the remaining "indebtedness," there was no distribution in complete liquidation within the meaning of section 112 (b) (6) of the Revenue Act of 1936, even though the creditor owned practically all of the stock of the insolvent corporation.
In so holding we said:
* * * The present petitioner received no property from Penick as a stockholder. The property of Penick which it received was transferred to it, not as a distribution in liquidation of Penick, but for a stated consideration, "a sum" and the cancellation of remaining "indebtedness." Penick distributed nothing to stockholders. It was*125 insolvent, with a very large deficit, and had nothing to distribute to stockholders. It sold its assets to pay a part of its debts. Since the facts do not support the only basis advanced for the determination of the Commissioner, that determination must be reversed as to these two items. * * *
To the same effect is Glenmore Distilleries Co., supra.
*225 While it is true that section 112 (b) (6) was involved in the H. G. Hill Stores Co. case and the Glenmore Distilleries Co. case and that section is not relied upon by petitioner here, nevertheless we think the controlling principle is the same. The only way that we could sustain petitioner in his contention that the transaction which took place between him and Monroe in 1941 was one in which no gain or loss should be recognized, would be to sustain him in his contention that the transaction was part of a plan of reorganization which began in 1934 in which Monroe and Ketler Co. were both parties, and continued on up to 1941. This we cannot do. Cf. W. F. Kennemer, 35 B. T. A. 415, affd. 96 F. 2d 177. In the Kennemer case, *126 we said: "To support petitioner's position, the contested distribution must have been 'in pursuance of' the plan of reorganization finally executed." (Citing authorities.)
As we have already stated we cannot find from the facts which have been stipulated that the transaction between petitioner and Monroe in 1941 was part of a plan of reorganization which was started in 1934 in which Monroe and Ketler Co. were both parties and continued on until 1941. There is nothing in the record which would justify us in making such a finding. Such being our conclusion from the facts which have been stipulated, we think respondent's determination must be sustained.
Decision will be entered for the respondent.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * * *
(g) Definition of Reorganization. -- As used in this section (other than subsection (b) (10) and subsection (1)) and in section 113 (other than subsection (a) (22)). --
(1) The term "reorganization" means * * * or (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders, or both are in control of the corporation to which the assets are transferred, * * *↩