*987 In 1922 the petitioner issued 19,997 shares of its capital stock and assumed notes payable of $455,000 in exchange for 321,275 shares in the Miley-Keck Oil Co. and other assets. The Miley-Keck Oil Co. stock was placed upon its books of account at a value of $1,285,100. In 1923 the petitioner exchanged 321,275 shares of stock in the Miley-Keck Oil Co. for capital stock in the Pacific Oil Co., having a readily realizable market value of $1,285,100 at the time of the exchange. Held, that the petitioner sustained no deductible loss upon the exchange. Held, further, that the petitioner was availed of for the purpose of preventing the imposition of the surtax upon its stockholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed and that it is liable to corporation tax equal to 25 per centum of the amount of its net income imposed by section 220 of the Revenue Act of 1921.
*143 This is a proceeding for the redetermination of a deficiency in corporation income*988 tax provided for by section 220 of the Revenue Act of 1921 in the amount of $44,047.19. The points in issue are:
(1) Whether the petitioner sustained a loss during the year 1923 of $250,594.50 on account of the exchange by it of stock in the Miley-Keck Oil Co. for stock in the Pacific Oil Co.
(2) Whether the petitioner was availed of in 1923 for the purpose of preventing the imposition of the surtax upon its stockholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.
(3) Whether the respondent erred in the computation of the tax asserted to be due under section 220 of the Revenue Act of 1921.
FINDINGS OF FACT.
1. On November 17, 1922, the petitioner was incorporated under and by virtue of the laws of the State of California, and ever since has been and now is a corporation, with its principal place of business at Los Angeles.
2. William M. Keck and Alice B. Keck were the owners of certain property hereinafter described which they, on or immediately prior to November 17, 1922, offered to transfer to petitioner in consideration of the issuance to them of 19,997 shares of petitioner's capital stock and*989 the assumption by petitioner of liabilities for notes payable in the sum of $455,000. The description of the property *144 so offered and the price at which offered (payable as above indicated) are as follows:
| 625,000 shares of the capital stock of Superior Oil Co | $625,000 |
| 5,000 shares of the capital stock of Star Petroleum Co | 70,000 |
| 999,980 shares of the capital stock of Keck Drilling Corporation | 500,000 |
| 321,275 shares of the par value of $1 | |
| each of the capital stock of Miley-Keck Oil Co | 1,285,100 |
| Total stocks | 2,480,100 |
| Notes receivable | 150,000 |
The petitioner accepted the offer and on November 17, 1922, the aforesaid stocks and notes receivable were duly transferred and assigned to the petitioner and it in turn issued to W. M. Keck and Alice B. Keck, in equal proportions, 19,997 shares of the par value of $100 each of its capital stock, and assumed liabilities represented by notes payable in the total sum of $455,000. In addition to the aforesaid 19,997 shares so issued, petitioner also issued three shares of its capital stock for cash at par, namely, $100 per share. The petitioner's balance sheet as taken from its books as of November 17, 1922, and*990 immediately thereafter reflected the following:
| ASSETS: | ||
| Cash | $300 | |
| Notes receivable | 150,000 | |
| Investments: | ||
| Superior Oil Co. stock | $625,000 | |
| Keck Drilling Corporation stock | 500,000 | |
| Star Petroleum Co. stock | 70,000 | |
| Miley-Keck Co. stock | 1,285,100 | |
| 2,480,100 | ||
| Total assets | 2,630,400 | |
| LIABILITIES: | ||
| Notes payable | 455,000 | |
| Capital stock | 2,000,000 | |
| Paid-in surplus | 175,400 | |
| Total liabilities | 2,630,400 |
3. In July 1923 the petitioner exchanged the 321,275 shares of stock of the Miley-Keck Oil Co. for capital stock of the Pacific Oil Co. having a readily realizable market value of $1,285,100 at the time of the exchange. The exchange was not in pursuance of any plan of reorganization and petitioner was not in control of the Pacific Oil Co. immediately after the exchange. The Pacific Oil Co. stock so received by petitioner was entered upon its books at $1,285,100 and no gain or loss upon the exchange was reflected on petitioner's books.
4. The Miley-Keck Oil Co. at November 17, 1922, owned oil and gas leases on 60 separate parcels of land in sections 34 and 35, T. 5 S., R. 11 W. and section 2, T. 6 S., R. 11 W. in Huntington Beach Townsite*991 *145 and contiguous thereto in Orange County, California. All of these leases were dated October 20, 1920. On November 17, 1922, the total liabilities of the Miley-Keck Oil Co. exceeded the fair market value of all of its other properties by the sum of $357,368.35. On November 17, 1922, the authorized and outstanding capital stock (all common) of the Miley-Keck Oil Co. amounted to 1,000,000 shares of the par value of $1 each.
5. Comparative balance sheets for the year under consideration, taken from petitioner's books, together with increases and decreases in balance sheet accounts, follow:
| ASSETS | Jan. 1, 1923 | Dec. 31, 1923 | Increase | Decrease |
| Cash | $1,208.64 | 30,467.71 | $29,259.07 | |
| Accounts receivalbe: | ||||
| W. M. Keck | (25,000.00) | 27,419.09 | 52,419.09 | |
| Notes receivable: | ||||
| M-K Oil Co | 275,000.00 | 150,000.00 | $125,000.00 | |
| Sup. Oil Co | 74,650.00 | 74,650.00 | ||
| Keck Drill. Co | 10,000.00 | 10,000.00 | ||
| Star Pet. Co | 20,000.00 | 20,000.00 | ||
| Investments: | ||||
| Sup. Oil Co | 625,000.00 | 930,012.00 | 305,012.00 | |
| M-K Oil Co | 1,285,100.00 | a | 1,285,100.00 | |
| Star Pet. Co | 70,000.00 | 70,000.00 | ||
| Keck Drill. Co | 500,000.00 | 400,355.96 | b | 99,644.04 |
| Pac. Oil Co | a 1,285,100.00 | 1,285,100.00 | ||
| W. M. K. Drill. Co | c 1.00 | 1.00 | ||
| Brock & Co | 15,000.00 | 15,000.00 | ||
| Accrued interest | 2,812.48 | 2,812.48 | ||
| Total | 2,754,121.12 | 2,923,005.76 | ||
| LIABILITIES & CAPITAL | ||||
| Notes payable | $80,000.00 | $75,000.00 | $5,000.00 | |
| Accounts payable | 5,002.50 | $5,002.50 | ||
| Accruals | 302.40 | 302.40 | ||
| Reserve 1923 Fed. tax | 9,902.79 | 9,902.79 | ||
| Capital stock | 2,000,000.00 | 2,000.000.00 | ||
| Surplus: | ||||
| Donated | 175,400.00 | 175,401.00 | c | 1.00 |
| Earned | 498,721.12 | 657,397.07 | 158,675.95 | |
| Total | 2,754,121.12 | 2,923,005.76 | 1,776,441.16 | 1,776,441.46 |
(6) An analysis of the surplus account, as shown by the books, is as follows:
| Taxable Net Income | Nontaxable Income | Total | Unallowable Deductions | Net Profit |
| $79,222.32 | $146,966.44 | $226,188.76 | $2,940.00 | $223,248.76 |
| Dividends Paid | Surplus Charges * | Addition to Surplus | Surplus Dec. 31 | |
| $50,000.00 | $14,572.81 | $158,675.95 | $657,397.07 |
*146 (7) A statement of the source and application of funds for the year 1923 follows:
| SOURCE OF FUNDS: | ||
| Net profits | $223,248.76 | |
| Collection of notes receivable: | ||
| Miley-Keck Oil Co | 125,000.00 | |
| Star Petroleum Co | 20,000.00 | |
| 145,000.00 | ||
| Sale of investments: | ||
| Star Petroleum Co | 70,000.00 | |
| Liquidating dividends - Keck Drilling Co | 99,644.04 | |
| Collection of interest income accrued in 1922 | 2,812.48 | |
| Liabilities increased: | ||
| Accounts payable | 5,002.40 | |
| Accruals | 302.40 | |
| 5,304.90 | ||
| Total | 546,010.18 | |
| APPLICATION OF FUNDS: | ||
| Retained as addition to cash account | 29,259.07 | |
| Withdrawn by W. M. Keck: | ||
| In payment of loan to corporation | 25,000.00 | |
| Loaned to W. M. Keck by corporation | 27,419.09 | |
| 52,419.09 | ||
| Notes receivable increased: | ||
| superior oil co | 74650.00 | |
| Keck Drilling Co | 10,000.00 | |
| 84,650.00 | ||
| Investments increased: | ||
| Superior Oil Co | 305,012.00 | |
| Brock & Co | 15,000.00 | |
| 320,012.00 | ||
| Liabilities decreased: | ||
| Notes payable | 5,000.00 | |
| Expenses of 1922 paid in 1923 | 2,127.24 | |
| Organization expense not capitalized | 2,542.78 | |
| Cash dividends paid | 50,000.00 | |
| Total | 546,010.18 |
*993 (8) The petitioner's income tax return for 1923 states its business as "investment and finance." Its return shows as follows:
| Interest on bank deposits, notes, mortgages, and corporation bonds | $31,882.45Profit from sale of real estate, stocks, bonds, and other capitalassets | |
| 75,754.00 | ||
| Dividends on stock of domestic corporations | 146,966.44 | |
| Total | 254,602.89 | |
| Deductions: | ||
| Interest | $16,860.92 | |
| Taxes | 2,580.00 | |
| Dividends from domestic corporations | 146,966.44 | |
| Brokerage | 2,022.93 | |
| transfer charges, etc | 354.43 | |
| Legal & professional fees | 5,150.00 | |
| General office expenses | 1,444.85 | |
| 175,380.57 | ||
| Net Income | 79,222.32 |
*147 The petitioner's tax liability was reported in the amount of $9,902.79, which was duly assessed and paid. The respondent determined the deficiency as follows:
| Net income as disclosed by return | $79,222.32 |
| Add: Dividends received | 146,966.44 |
| Total | 226,188.76 |
| Deduct: Dividends paid | 50,000.00 |
| Income undistributed | 176,188.76 |
| 25% tax imposed by section 220 on $176,188.76 | 44,047.19 |
| Income tax, section 230 on $79,222.32 at 12 1/2% | 9,902.79 |
| Total tax liability | 53,949.98 |
| Original tax assessed, Account #401980 | 9,902.79 |
| Deficiency | 44,047.19 |
*994 OPINION.
SMITH: Although the petitioner claimed no deduction from gross income for the year 1923 in respect of an alleged loss on the exchange of 321,275 shares of capital stock of the Miley-Keck Oil Co. for shares of stock of the Pacific Oil Co., it alleges in its petition that the respondent erred in refusing to allow the deduction of a loss of $250,594.50 upon such exchange. The basis of this claim is that the fair market value of 321,275 shares of stock of the Miley-Keck Oil Co. at the time acquired by it in exchange for shares of its own capital stock was $1,535,694.50 and that inasmuch as the fair market value of the stock of the Pacific Oil Co. at the time it was received by it in 1923 in exchange for the stock of the Miley-Keck Oil Co. is deemed to have been $1only,285,100, the difference represents a deductible loss.
When the petitioner acquired the 321,275 shares of stock of the Miley-Keck Oil Co. on November 17, 1922, they were placed upon its books as an asset at $1,285,100. The petitioner now contends that that entry was in error. Although admitting that the values of the other assets placed upon its books of account in 1922 represented their fair market value, *995 it contends that the fair market value of the Miley-Keck Oil Co. stock was $1,535,694.50. In support of this contention the petitioner has adduced the testimony of John R. Roberts, an internal revenue agent, who in 1927 valued the leasehold interests of the Miley-Keck Oil Co. as of November 17, 1922, for the purpose of determining proper allowances for depletion. He estimated that the petitioner should recover 7,651,296 barrels of oil from its leasehold interests and that the value of the oil in the ground on November 17, 1922, was $5,141,670.91. Inasmuch as *148 the liabilities of the Miley-Keck Oil Co, was $357,368,35 in excess of all assets, exclusive of the leasehold interests, the petitioner assumes that the net value of the assets of that company on November 17, 1922, was $5,141,670.91 less $357,368.35, or $4,784,302.56. Since the company had 1,000,000 shares of stock outstanding, the petitioner assumes that the fair market value of all of its shares on November 17, 1922, was $4,784,302.56, or at the rate of $4.78 per share, and that the fair market value of the 321,275 shares acquired by the petitioner was $1,535,694.50. The petitioner also adduced the testimony*996 of William M. Keck, who stated that in his opinion the value of the stock at the date of the organization of the petitioner was in excess of $5 per share.
We think that the evidence presented by the petitioner does not overcome the presumption of the correctness of the taxpayer's books of account and of the determination of the respondent in accordance therewith. We have no reason to assume that in 1922 the value of the 321,275 shares of stock of the Miley-Keck Oil Co. was determined on any basis different from that of the other assets acquired by the petitioner at the same date and the petitioner admits that the other assets were placed upon its books of account at their fair market value. The valuation by the revenue agent in 1927 was for the purpose of determining a correct allowance for depletion. It may or may not have borne a direct relationship to the fair market value of the shares of stock of the Miley-Keck Oil Co. Even if it did bear such relationship to the total number of shares outstanding, it is by no means proved that the fair market value of 321,275 shares was at the same rate as the total number of shares outstanding, namely, 1,000,000. We think that the estimate*997 of the officers of the corporation in 1922 is entitled to more weight than the estimate of William M. Keck in 1932, the date of the hearing of this proceeding, that the shares of stock in 1922 had a fair market value of $5 per share. It is furthermore to be noted that there is no evidence that the fair market value of the 321,275 shares of stock in question suffered any diminution from the date of acquisition by the petitioner to the date of exchange in 1923 for shares of stock of the Pacific Oil Co., and both parties agree that in 1923 the fair market value of the shares of stock of the Pacific Oil Co. received in exchange was $1,285,100. Furthermore, the petitioner's books of account do not reflect that it sustained any loss in respect of the exchange transaction. We, therefore, think that there is no basis for the claim of a deductible loss on the part of the petitioner in respect of the exchange. The contentions of the petitioner upon this point are not sustained.
The deficiency notice dated February 27, 1928, forming the basis for the petition, states:
* * * the *149 information on file discloses that inasmuch as the stock of the Keck Investment Company is closely*998 held, and whereas balance sheets submitted with your return for the year 1923 disclose the fact that you received during the year, taxable income and nontaxable dividends in the aggregate amount of $226,188.76, and distributed to your stockholders within the year dividends aggregating only $50,000.00, this office holds that your corporation was availed of for the purpose of evading the imposition of surtaxes upon its stockholders and that the tax imposed by Section 220 of the Revenue Act of 1921 attaches to the year 1923. * * *
Section 220 of the Revenue Act of 1921 provides:
That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall be computed, collected, and paid upon the same basis and in the same manner and subject to*999 the same provisions of law, including penalties, as that tax: Provided, That if all the stockholders or members of such corporation agree thereto, the Commissioner may, in lieu of all income, war-profits and excess-profits taxes imposed upon the corporation for the taxable year, tax the stockholders or members of such corporation upon their distributive shares in the net income of the corporation for the taxable year in the same manner as provided in subdivision (a) of section 218 in the case of members of a partnership. The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner, or any collector, every corporation shall forward to him a correct statement of such gains and profits and*1000 the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each.
The evidence indicates that the petitioner was purely a holding or investment company in 1923. All but one of its shares of stock were held equally be William M. Keck and Alice B. Keck, his wife. Interest and dividends which were received by it in 1923, and income from other sources, were used for paying certain expenses and the balance was principally availed of for further investment, with the exception of $50,000 which was paid out as dividends to stockholders.
The petitioner contends that it was necessary for it to finance the Superior Oil Co., which had little bank credit, and that if it had not financed that company its investment in it would have been lost by forfeiture of leases. We are not, however, impressed by this argument. The business of the Superior Oil Co. was not the business of this company. After a careful consideration of all of the evidence *150 we conclude that the petitioner was organized primarily as a holding company for the purpose of holding certain of the investments of*1001 William M. Keck and Alice B. Keck. It was so operated in 1923. If the Keck Investment Co. had not been formed there is no question but that the two principal stockholders would have been liable to surtax not only upon the net income shown by the petitioner upon its income tax return for 1923, but also to income tax upon $146,966.44 of dividends from domestic corporations. Through the instrumentality of the petitioner surtax was avoided by the two principal stockholders upon all but $50,000 paid by the petitioner as dividends. The action of the respondent in holding the petitioner liable to the 25 percent tax imposed by section 220 of the Revenue Act of 1921 is sustained. Cf. ; affirming ; .
The third contention of the petitioner is that the respondent erroneously and illegally computed the tax asserted to be due under the provisions of section 220 of the Revenue Act of 1921 in that he computed a tax of 25 percent on an amount equal to the net income of*1002 petitioner plus dividends received by petitioner from domestic corporations less the amount of dividends paid by petitioner during the year, instead of a tax of 25 percent upon petitioner's net income for the year 1923, as provided by section 220. Upon brief the respondent concedes error in his computation and states that the petitioner's return for 1923 discloses net income of $79,222.32 and that the correct deficiency thereon would be 25 percent of that amount, to wit, $19,805.58.
Reviewed by the Board.
Judgment will be entered for the respondent in the amount of $19,805.58.
TRAMMELL, BLACK, GOODRICH AND ADAMS dissent on the application of section 220 of the Revenue Act of 1921.