*634 1. The transfer to and acquisition by petitioner corporation in 1935 of depreciable and depletable properties for its shares, credits, cash, and a promise to pay cash over a period, held not to be in a reorganization under the Revenue Act of 1934, section 112, and therefore the basis of depletion and depreciation is cost and not the predecessor's basis.
2. Petitioner's opening inventory used on its first return held, upon the evidence, not to be based upon the lower of cost or market, and petitioner is not entitled to use market value as a factor of inventory; held, further, upon the evidence, that the figures of inventory used on the return and adopted by the Commissioner are sustained.
*874 The Commissioner determined for the fiscal year ended November 30, 1936, a deficiency of $27,180.71 in income tax and of $2,558.54 in excess profits tax, and a penalty of $639.64; and for the fiscal year ended November 30, 1937, a deficiency of $16,613.39 in income tax. Petitioner assails the basis used in computing deductions for depreciation*635 and depletion allowances, contending that it acquired the assets involved by tax-free transfers in the course of a reorganization, entitling it to the predecessor's basis, and that the prices at which bondholders bid in the assets under foreclosure for transfer to it are not to be regarded as its cost. It also seeks to change the basis of valuation for timber inventory.
FINDINGS OF FACT.
Petitioner is a Nevada corporation, with principal office at Portland, Oregon. It prepares its income tax returns on an accrual basis for the fiscal year ending November 30. For the fiscal years 1936 and 1937 it filed its income tax returns with the collector at Portland, Oregon. It filed no excess profits tax return for the fiscal year 1936.
1. Petitioner was organized on March 26, 1935, in accordance with a plan submitted by the receiver of the Pacific Spruce Corporation and approved by the District Court of Oregon. Pacific, a Delaware corporation, was engaged in the logging and manufacture of lumber, making sales through the C. D. Johnson Lumber Co., it wholly owned subsidiary. It and the subsidiary became insolvent in 1930, and upon petition of a shareholder and a creditor, the*636 District Court of Oregon on February 5, 1931, appointed a receiver who took over and operated the corporation's business until discharged in January 1936.
When the receiver was appointed, Pacific had outstanding 27,090 1/2 preferred shares and 485,805 common shares. The holder of a preferred share was entitled to annual cumulative dividends of 7 percent from January 1, 1929, and on liquidation or redemption to $110 before any distribution on common shares. The preferred share did not entitle the holder to any vote except that the consent of the holders of a majority of them was necessary for adoption of any proposal impairing preferred shareholders' rights. Pacific's assets comprised (1) 15,000 acres in Lincoln County, Oregon, containing an estimated 600,000 M feet of timber and improved with transportation and logging facilities; (2) possession and use of a sawmill and millsite, timber, booming grounds, and appurtenances near Toledo, Oregon, *875 acquired from United States Spruce Production Corporation by an executory contract of purchase, under which $436,108.33, unpaid balance of the purchase price, was to be paid before transfer of legal title; (3) two railroads, *637 24 1/2 and 14 miles long, respectively, serving the mill near Toledo, which were mortgaged to the Consolidated Securities Co. to secure 5 percent notes of a face amount of $1,000,000, and (4) two ships, barges, tugs, and other floating equipment, mortgaged to secure payment of $70,000 of their purchase price. Subject to the encumbrances mentioned, all of these properties were mortgaged to secure $3,500,000 face value first mortgage and refunding 6 1/2 percent sinking fund gold bonds, issued by Pacific, of which $2,421,100 par value and interest from October 1, 1930, was unpaid. In addition, Pacific owned unencumbered a log and lumber inventory of a book value of $700,000, accounts receivable of $140,000, and securities and miscellaneous assets of a book value of $150,000. It owed $284,000 to the Pendleton Timber Co. on the purchase of timber, and about $200,000 of miscellaneous unsecured debts.
In the first report to the court on July 15, 1931, the receiver expressed the opinion that Pacific's assets were inadequate to meet the obligations for which they were mortgaged. During the years 1931-1934 his operation of Pacific's business resulted in losses. No dividends were paid*638 on the preferred shares after January 1, 1929. In April 1931 a default in the payment of interest on the bonds resulted in the formation of a bondholders' protective committee, with which the holders deposited over 95 percent of the bonds under an agreement authorizing it to exercise all the rights and powers of owners. The trustees of the bonds then intervened in the receivership proceeding, seeking foreclosure of the mortgaged properties. The two ships were libeled by the mortgagee and sold for less than the amount of the secured debt. The timber sales contract of Pendleton Timber Co. with Pacific was canceled. The United States Spruce Production Corporation petitioned for foreclosure of its executory contracts for Pacific's purchase of the Toledo mill and related properties, and a provisional decree of foreclosure was entered in December 1934.
During this time Pacific's officers and representatives of the bondholders' committee and other creditors were in active negotiations for the formulation of some plan of orderly liquidation which would permit the parties in interest to realize a maximum amount from Pacific's assets. As the several types of properties were necessary*639 for operation of the business as a unit, separate foreclosures and divided ownership would have been disadvantageous. There were substantial differences of opinion among the bondholders, creditors, and shareholders; even the common shareholders desired some benefits from a reorganization, although it was generally recognized that assets *876 were inadequate for any distribution on common shares. after several plans had been abandoned because the capital required by them could not be raised, the parties in negotiation agreed upon the "Plan of Reorganization" submitted by the receiver to the District Court and approved on January 9, 1935. This plan provided that United States Spruce Production Corporation, the Consolidated Securities Co. and the trustees for the bondholders foreclose and acquire the Pacific properties mortgaged respectively to them, and that each then sell or lease the assets so acquired to a new corporation. Any deficiency judgment that might remain after sale on foreclosure and Pacific's one-year equity of redemption was to be assigned to the new coporation. Other debts and taxes of Pacific, compromised by agreement with the creditors, were to be paid by*640 notes of the new corporation. The new corporation was to issue 6,766.7 preferred shares and 84,000 class A common shares to a corporation to be organized by the bondholders and 126,000 class B common shares, one-half to Pacific's preferred shareholders proportionate to their holdings and one-half to the organization manager. The receiver and trustees, being "of the opinion that there is no equity for the common stockholders," made no provision for them except a limited offer of class B shares at $5, which no one accepted. The plan was submitted to Pacific's preferred and common shareholders; holders of 25,910 preferred and 341,406 common shares voted approval. The committee advised each bondholder of the plan in detail, instructing any one disapproving it to withdraw his bonds from deposit. No one did so.
In execution of the plan and with approval of all parties in interest, petitioner was organized as the new corporation and the following was done:
A final decree of foreclosure of Pacific's contract to purchase the mill and related properties from United States Spruce Production Corporation was, with the consent of all interested parties, entered on April 8, 1935, and on*641 May 31, 1935, the Spruce corporation agreed to sell the properties to petitioner for $436,108.33, payable in installments, on terms similar to but more favorable than those in its contract with Pacific. This price equaled the amount of the unpaid balance under the contract with Pacific.
The Pacific properties mortgaged to secure its bonds (then $2,298,200 face value outstanding) were offered for sale under a foreclosure decree of July 19, 1935, and were acquired by the bondholders' trustee on a bid of $1,500,000. The sale was approved by the court and a deficiency judgment of $1,647,959.62 plus interest was entered, together with an order that the trustee assign or cause the assignment of the deficiency judgment to petitioner. In conformity with procedure outlined in the mortgage agreement made when the bonds were issued, the Pacific *877 Spruce Timber Co., a Delaware corporation, was organized by and for the bondholders. The trustee then transferred to it all the properties acquired by foreclosure, and in consideration therefor it issued all its shares to the bondholders proportionately to their holdings. The Pacific Spruce Timber Co. contracted on October 26, 1935, to*642 sell its assets to petitioner for $1,669,100, payable in installments. Immediate possession was given the purchaser, but title was not to pass until full payment should be made. Petitioner was expressly permitted to remove timber, paying therefor at a rate fixed by a prescribed method of computation, such payments to serve as credits on the purchase price of the assets. These payments for timber were "substantially lower than the former release values, the payment of which was required by the terms of the foreclosed mortgage." On November 18, 1935, petitioner issued to the Pacific Spruce Timber Co. 6,291 preferred shares and 84,000 class A common shares of its capital stock, and received from that company an assignment of the deficiency judgment, a conveyance of cut-over land, 997 shares of C. D. Johnson Lumber Co., which had been pledged with the trustees, and the above contract of purchase. The par value of the preferred shares ($629,100) and the total payments due the Pacific Spruce Timber Co. under the contract ($1,669,100) were equal, as the plan contemplated, to the face amount of the bonds ($2,298,200). The preferred shares were callable at $100, and, after payment of the*643 amount due under petitioner's contract with United States Spruce Production Corporation, from 320 to 540 were to be redeemed each year. No dividends were payable on the common shares until all preferred shares should be retired. Preferred shareholders had no vote unless their rights as shareholders were involved in any proposed action. Each share of common stock was entitled to one vote.
The railroad properties mortgaged to secure payment of the notes of $1,000,000 were sold under a foreclosure decree to the Anglo-California National Bank on a bid of $500,000. The sale was approved by the court on July 29, 1935, and a deficiency judgment of $756,618.50 with interest was entered against Pacific in favor of the mortgagee, Consolidated Securities Co., which assigned the judgment to petitioner. The bank then leased the railroads to petitioner for 50 years for a rental determinable by reference to the amount of logs hauled.
On November 23, 1935, petitioner purchased Pacific's unencumbered assets at a sale by the receiver for a bid price of $700,000, of which $200,000 was payable in cash and $500,000 by credit on the deficiency judgments assigned to it. This bid was made pursuant*644 to a directors' resolution of October 22, directing petitioner's officers to bid "$700,000 and, if required, up to the sum of $2,000,000 on behalf of this corporation, for the receivership assets of Pacific." After this *878 purchase, petitioner assigned the mortgagor's right to redeem within one year the properties foreclosed under the bondholder's mortgage to Pacific Spruce Timber Co. and assigned the redemption right to the foreclosed railroad properties to the Anglo-California National Bank. Petitioner assumed all debts and liabilities which were a charge against the receivership assets and which comprised taxes of $106,663.23 and debts of $58,548.14. These amounts resulted from compromise arrangements and were payable in installments. To meet its purchase obligations, petitioner borrowed $250,000 from the Federal Reserve Bank of San Francisco, assigning to the bank as collateral its rights under its contract with the Pacific Spruce Timber Co., its contract with United States Spruce Production Corporation, and the lease of the railroad properties.
Petitioner issued 63,000 class B common shares to preferred shareholders of Pacific proportionately to their share ownership, *645 and 63,000 class B common shares to C. D. Johnson. Johnson owned 1,407 preferred and 40,135 common shares of Pacific. He had been president and manager of Pacific for many years and continued as such for petitioner until his death in May 1940. The 63,000 shares were issued to him in recognition of his services in management and in bringing about the reorganization.
The court, on December 2, 1935, approved the several steps taken in consummation of the plan, and directed the receiver to continue operation of the business on account of petitioner. He did so until discharged on January 13, 1936. Pacific and its subsidiary have been "allowed to die" for nonpayment of state license fees; formal dissolution would have been too expensive.
The amounts of the bondholders' bid of $1,500,000 and of the Anglo-California bank's bid of $500,000 at the foreclosure sales and of petitioner's bid of $700,000 at the receiver's sale were discussed and agreed upon in advance by representatives of Pacific, petitioner, the receiver, and the mortgagees. They were designed and intended to leave a large deficiency judgment for petitioner's use under the plan, being at the same time sufficient in*646 amount to be reasonable and to preclude any higher bids. Petitioner has continued Pacific's business operations, using the same properties, serving the same customers; and retaining the same management.
Petitioner's opening balance sheet of December 1, 1935, shows total assets of $5,542,823.49. Among these assets are "Timber and Timber Lands $1,779,514.24," comprising "United States Spruce Production tract" carried at $83,954.74, and "Pacific Spruce Timber Company tract - under contract" carried at $1,669,100. The former figure is based upon appraisals made by an appraisal company in 1934 and 1935, with adjustments for depreciation; the latter figure is the *879 amount payable under the contract. Other assets were carried at estimated values. "Real Estate, Plant, Equipment & Facilities," comprising the logging plants and equipment, were entered on the opening balance sheet at a total of $3,061,274.09. No figures on the balance sheet are related to the prices bid for assets at the foreclosure and receiver's sales.
By use of book figures as bases, petitioner computed and claimed deductions of $250,152.07 for depletion of timber properties and of $190,630.96 for depreciation*647 of plants and equipment, for the fiscal year 1936. The Commissioner disallowed $63,096.35 and $126,380.35 of the respective amounts claimed. By use of book figures as bases, petitioner claimed deductions of $225,081.51 for depletion of timber properties and of $196,130.13 for depreciation of plants and equipment for the fiscal year 1937. The Commissioner disallowed $23,707.46 and $126,056.90 of the respective amounts claimed.
2. Among the assets acquired by petitioner for $700,000 at the receiver's sale of Pacific's unencumbered properties were 16,104,438 feet of lumber. Pacific had carried the lumber inventory at $23.66 per M feet; the receiver carried it at $12.40. On petitioner's opening balance sheet of December 1, 1935, the receiver's figure was retained, the inventory being entered at $12.40, or $199,695.03. A certified public accountant, in 1940, determined the cost (less depreciation) of this inventory to the receiver to have been $15.22 per M feet, and determined a figure of $17.28 per M feet as fair market value as of December 1, 1935. Petitioner's president insisted on placing the receiver's figure on the books because he wished "a good showing" for the first*648 year's operations. At the close of the first fiscal year, November 30, 1936, the inventory was valued on petitioner's books at $16.55 per M feet, a figure representing average cost of production. Book figures were used in computing the cost of goods sold in the preparation of the income tax return for the fiscal year 1936. On that return it was stated that inventories were valued at: "Lower of cost or market at Nov. 30, 1936, at Dec. 1, 1935, value as stated on books of receiver of predecessor company."
As of the close of the second fiscal year, November 30, 1937, the accountant assigned to petitioner's timber inventory a figure of $15.10 per M feet as "market value." On petitioner's books it was valued at $17.69 per M feet, representing average cost of production. Book figures were used in computing the cost of goods sold in the preparation of the income tax return for the fiscal year 1937. On that return it was stated that inventories were valued at cost.
Petitioner has never made application to the Commissioner for permission to change its inventory basis. The Commissioner adopted the inventory values used in the petitioner's returns for the fiscal years 1936 and 1937.
*649 *880 OPINION.
STERNHAGEN: 1. (a) The petitioner assails the partial disallowance of depletion and depreciation deductions for 1936 and 1937. It claims that the computation should be made upon the same basis as that of its predecessor, the Pacific Spruce Corporation, because, it contends, it acquired the properties in a reorganization, as defined in Revenue Act of 1934, section 112(g)(1). 1 The essential controversy is whether the statutory definition of the term "reorganization" has been met. The case was tried and submitted before the decisions of the Supreme Court of February 2, 1942, in ; ; ; and , and the briefs were largely devoted to the consideration of the cases which had been decided in the several Circuit Courts of Appeals and in the Board. These considerations must now be adjusted to the reasoning of the Supreme Court.
*650 Of paramount importance is the fact that this case arises under the 1934 Act, for the difference between that statute and the earlier Act of 1928 is an important factor of the decision is the Southwest Consolidated case, which involved the later statute. The generalizations which have affected the reorganization decisions under the earlier acts, such as the importance of continuity of interest, are subordinate, in considering reorganizations of later years, to the express legislation which has laid down specific conditions to be literally complied with if the definition is to be applied. It is not enough, under subdivision (B) in the 1934 Act, that, underlying a transfer of property from the old corporation to the new, there is a continuing interest of the same persons - the transfer must be "in exchange solely for all or a part of [the new corporation's] voting stock." "Solely leaves no leeway." "Voting stock plus some other consideration does not meet the statutory requirement." And it is not enough, under subdivision (C), that the bondholders or other creditors of an insolvent corporation should*651 continue *881 in control of the new - the continuing control must be, as prescribed in subdivision (h), by ownership of shares, ; and this is not satisfied by regarding the bondholders or other creditors of an insolvent corporation as if they were the shareholders.
In the present case, to treat the transfer to, and acquisition by, petitioner as in reorganization would be directly contrary to the 1934 statute as expounded in the Southwest Consolidated case. Even though the petitioner acquired the assets of the Pacific Co. (ignoring the mesne transfer to the Timber Co.), the acquisition was not solely in exchange for petitioner's shares, as subdivision (B) requires; to a large extent, it was in exchange for petitioner's promise to pay $1,669,100, a large part of the stated price of the assets sold on foreclosure of the bonds, the remaining part being preferred and common shares of petitioner. The acquisition of the other three groups of assets was not in exchange for any shares.
*652 Subdivision (C) is not met, because the control of the petitioner immediately after the transfer did not rest in the Pacific corporation or its stockholders or both, but rested (again ignoring the intervention of the Timber Co.) in the bondholders and preferred shareholders of the Pacific Co. Furthermore, since the petitioner's proposed future payments of $1,669,100 were to be made to the Timber Co. (which, arguendo, may be identified with the former bondholders who held its shares), , prevents recognition of a statutory reorganization; for, instead of the former bondholders becoming shareholders through the foreclosure, they continued to a large extent to be creditors. This is not, even under the earlier statute, a proprietary interest or similar to the continuing interest of actual or constructive shareholders.
It is held, therefore, that the Commissioner correctly held that the assets were not acquired by petitioner in a statutory reorganization and disallowed the deductions taken by petitioner for depreciation and depletion upon the same basis as had been applicable to the deductions of the Pacific Co.
(b) The Commissioner, *653 after determining that petitioner had not acquired the depreciable and depletable properties in a statutory reorganization, held that the petitioner's basis for such deductions was its cost. In its petition, petitioner did not (except as affected by the reorganization issue) assail the figures which the respondent had used as bases, nor did it at the hearing propose to show by evidence what figures should be taken as cost bases in lieu of those used by the Commissioner if it were held that no statutory reorganization had occurred. This was expressly referred to by respondent's attorney in his opening statement, and no attempt was made by petitioner, *882 either by amended pleading or otherwise, to establish bases other than those used by respondent. It was contended only that the refusal to recognize a reorganization and to use the predecessor's basis in computing the deductions was error, thus leaving it inferable that, if it were held that no statutory reorganization had occurred, no attack would be made upon the figures used. At that time the reorganization cases in the Supreme Court had not yet been decided and the subject of reorganization was in conflict in the lower*654 courts; so the petitioner had no reason for assurance as to the proper basis, and if the Commissioner's computation was believed to be in error, it should have been assailed in the petition and the correct basis established by evidence. The case was tried in September 1941, and petitioner's attorney died in November 1941. The decisions of the Supreme Court in the four reorganization cases came down in February 1942. On March 9, 1942, petitioner, by new attorneys, moved for leave to file an amended petition and to reopen the proceeding at Portland, Oregon, for further testimony upon the question of fair market value of the properties. Respondent vigorously opposed these motions, showing, among other things, that the subject had been expressly mentioned at the hearing and that petitioner had failed to cover it as it might have attempted to do. After consideration of the arguments upon the motion, it was denied.
The basis and method of the Commissioner's determination do not appear clearly in the deficiency notice, and the evidence indicates that as to some of the properties book values were used, as they had also been used by petitioner in the returns. There is evidence to indicate*655 that the books reflected figures other than cost and to some extent were made up from appraisals and contained appreciation adopted from opinions. It can not be said from the evidence that the Commissioner's determination of the deductions was in error, nor can any other figures be found as the correct figures established by the evidence. The Commissioner's determination as to the deduction applicable to each of the several units and groups of assets must, therefore, be sustained. Indeed, it is hard to conceive of any better, in view of the composite assets of various kinds and the difficulties of finding actual, or devising constructive, costs to be attributed to the separate units or groups to which depreciation or depletion is to be applied. Under the circumstances, it is easy to believe that petitioner, by its former attorney, acted upon a considered judgment in omitting to assail the determination except upon the ground of a statutory reorganization.
The Commissioner's determination of deductions for depreciation and depletion is sustained.
2. The Commissioner, in determining the deficiency, made no change in the inventory figures used by the petitioner on its returns. *656 Petitioner *883 now claims that its inventory figures for lumber were in error and should be corrected; that for the beginning and end of each of the two years in question the figure should be based on the lower of cost or market because this was the basis which it elected to use for the inventory of its first return, and, in the absence of a permitted change in the basis, the lower of cost or market must be used in each subsequent inventory. The respondent urges that the inventory has not in fact been valued by petitioner at cost or market, whichever is lower; that no permission of the Commissioner has been asked, as a change would require, and none has been given, and that petitioner may not use the lower of cost or market.
For its opening inventory - that of December 1, 1935 - petitioner used a figure of $199,695.03, based upon the unit figure of $12.40, as shown on its first return. This had been used by the predecessor receiver during the preceding five years. The figure had been constant throughout the receivership period, and had been fixed by the receiver when he took over the property in February 1931. When petitioner acquired the manufactured lumber as part*657 of the composite group of assets for a lump sum of $700,000, it entered on its own books the same figure as had been on the receiver's books. N0 attempt was made at that time to ascertain the fair market value of the lumber in the inventory, nor was any effort made to relate the lumber in the inventory to the entire group of assets acquired as a means of finding the proportionate cost of the lumber. The inventory figure was merely carried over from the receiver's books, the only explanation being that the president of the new corporation, the petitioner, wanted a good showing for the first year's operations. So far as the evidence shows, there was no knowledge at that time as to whether the figure being placed on the books was in fact the lower of cost or market.
To support its contention that the figure was the lower of cost or market, petitioner caused its accountant to make a study in 1940 for the purpose of this proceeding. This, however, is not probative that an election had been made in 1936. The only probative evidence on that point is that in its return for 1936, filed in 1937, appears the following statement: "Lower of cost or market at Nov. 30, 1936, at Dec. 1, 1935, value*658 as stated on books of receiver of predecessor company," although, as has been stated, it was entirely unknown then whether it was in fact the lower figure. Indeed, the one who prepared the return testified that it was an incorrect statement. Apparently the first effort to ascertain market value was December 1937, when the petitioner's accountant was working on the 1937 return. He made a computation which indicated to him that the net realizable proceeds on November 30, 1937, would be about $15.22 per M, and he then sought the approval of the president to use the lower of cost or market, *884 asked for a computation of market values, and this indicated realizable net proceeds of $15.10. The president refused to permit the change of the inventory from cost to market, because the books already showed a loss and he did not want to increase it. In the return for 1937 it was stated that the inventory was based on cost.
The petitioner's primary ground for demanding that its inventories for both years be computed at the lower of cost or market is that in its first return it stated that its inventories were valued on that basis; that this statement is the expression of an election; *659 and that, having made the election, it is bound to and entitled to have that basis used and continued. It can not, however, be found that the petitioner in its first return elected to have its inventories valued at the lower of cost or market. It is clear from the evidence that it did not in fact make such an election, even though it stated in its 1936 return that the closing inventory was on that basis. At that time it did not know the market value on either the opening or closing date. The use of the figure of $12.40 in the opening inventory was not because it was the lower of cost or market, but because it was imported from the receiver's books, where in turn it was not a figure either of cost or market. Certainly, as to the opening figure, it can not, upon the evidence, be found that its use was an election between cost and the lower of cost or market. As to the closing inventory of 1936, said in the return to have been valued at the lower of cost or market, the evidence shows that the statement was incorrect. The figure used was an accountant's computation of average cost of production, without regard for the fact that the lumber was to a large extent acquired among the*660 assets purchased at auction for a lump sum price of $700,000. It was purely a mathematical figure, the relation of which to cost is not shown. The same figure was used as the value of opening inventory of the following year, and in that return it is expressly stated that the inventory was valued at cost, without reference to market.
Under these circumstances, it can not be said from the evidence that market value was ever in these two years a factor in the valuation of the inventory or that petitioner elected to value its inventory at the lower of cost or market. Cf. . Market value, even if it had been satisfactorily proven, is irrelevant.
Petitioner contends, however, that the opening figure of $12.40 is, in any event, not the correct cost figure applicable to it, and demands instead a figure of $15.22, which would have the effect of reducing its income for 1936 by $45,414.52. While the evidence shows that the figure of $12.40, upon which the opening inventory is valued, may not be petitioner's cost because it was simply brought onto its books *885 from the books of the receiver, where it had been a*661 static inventory figure for five years, this only reaches the point where petitioner must affirmatively prove the correct cost. This, we think, it has not successfully done.
The figure of $15.22 was derived by petitioner's accountant from a larger figure of cost postulated as the cost to the receiver, irrespective of the use by the receiver of the $12.40. It is not necessary to consider whether this figure of $15.22 does fairly or accurately reflect the receiver's cost; for it is the petitioner's cost with which we are concerned in this proceeding and not that of its predecessor. As has been noted, the lumber in the inventory was acquired by petitioner among the assets which as a whole cost it $700,000. Since the acquisition was not in a reorganization and the predecessor's cost does not carry over into the succeeding owner's basis, the petitioner is bound to use its own cost, which is found in its purchase price of all the assets. The portion of that price which is properly to be regarded as the cost of any particular part of the assets may conceivably be determined in various ways upon evidence directed to that fact; but it seems clear that it is not established by a retrospective*662 determination of an adjusted cost of production of the preceding owner in the preceding year.
As to the proper part of the petitioner's cost of $700,000 to be allocated to the lumber inventory, the evidence affords no answer different from or better than the $199,695.03. No other finding could be made which would be supported by the evidence, and we therefore sustain the use of that figure as the opening inventory for the 1936 determination.
Since the inventory is not properly determinable with reference to market values and such values are not a factor, the petitioner's claim that its closing inventory for 1937 should be reduced from the book value of $17.69, which it used and which the Commissioner adopted without change, to $15.10, a constructed market value, must be denied, irrespective of the method by which such market value figure was determined.
On the entire lumber inventory question, we hold that the evidence supports no ground for using figures different from those used on the returns and the deficiency determination.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means (a) a statutory merger or consolidation, or (b) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of 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 another corporation; or of substantially all the properties of another corporation, or (c) 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 stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected. ↩