*857 1. Fair market value of certain properties, and deductions claimed as allowable for bad debts and stock losses, determined.
2. Preferred stock was retired by the issuance of bonds in the face amount of the par value of the stock, plus unpaid dividends and a premium, this being the amount required for retirement of the stock. The dividends had been declared and ordered paid, and assets were available to pay same. Held, that, as to the par value of the stock, the exchange of stock for bonds was a nontaxable exchange and the basis of the bonds to that extent was the basis of the stock exchanged; held, further, that the cost of the bonds, so far as issued for declared dividends, was the fair market value of the bonds at the time of the dividend payment; held, further, that the bonds, so far as issued in exchange for the right to premium, had no basis aside from that of the stock; and the basis of all of the bonds is determined as .885627705 of face value.
3. The corporation's charter expired in 1925. State statute provided a three-year period for settlement of corporate affairs. Liquidation distribution of the assets was made after the expiration of the three*858 years. Held, there was no constructive receipt by stockholders (or their assignee) upon the expiration of the three-year period, but that the liquidated assets constituted income when actually received, at a later date; held, further, that corporate dividends paid by another corporation, stock of which was owned by the dissolved corporation, to the liquidation trustees, constituted liquidation dividends reportable in the year when paid by liquidation trustees to assignee of stockholders in dissolved corporation. Value of liquidated assets and basis therefor, determined.
*578 The respondent determined deficiencies in income taxes for the years 1927, 1928, and 1929 in the amounts of $17,454.62, $102,747.99, and $181,136.13, respectively. The stipulations filed are adopted as a part of our findings of fact and are set forth literally or in substance, in connection with other findings of fact on the evidence, only to the extent found necessary for understanding and determining the issues involved.
Fifty-four errors*859 are assigned in the petition and denied in the answer and in an amended answer, which alleges also that income "as stated in the notice of deficiency is understated in the amount of one-half of $168,750.00 for 1928 and in the amount of one-half of $140,000.00 for 1929, through failure to include therein one-half of *579 the dividends received by petitioner and her husband from Gladys City Oil, Gas and Manufacturing Company from February 1, 1928, to December 31, 1929", which amounts are alleged to be ordinary dividends paid petitioner and her husband in 1928 and 1929, respectively, no part of which, it is alleged, is included in computing the asserted deficiencies. Increased deficiencies are accordingly prayed. The petitioner made reply, denying that dividends were paid to her and/or her husband, except as admitted in stipulations and exhibits thereto and adopted herein as part of our findings of fact.
The petitioner also filed certain amendments to her assignments of error and to the grounds stated in the petition upon which she relied to sustain the same, all of which will be set forth in substance and discussed.
The respondent duly filed answer to the amendments to*860 the petition, denying the allegations contained therein.
Stipulations eliminate all issues except the following:
1. Did petitioner sustain a loss from a bad debt in 1927 on account of moneys advanced by John H. Kirby to either the Buena Fe Mining Co. or the Kirby Development Co. and did the stock of said companies become worthless in 1927?
2. Was any deductible loss sustained by petitioner in 1927 and 1928 of moneys advanced to the Southern Tariff Association?
3. Was a taxable gain realized by petitioner in each of the years 1927, 1928 and 1929 from the sale of bonds of the Kirby Lumber Co.?
4. Did the March 1, 1913, value of 218.04 and 193.53 acres of land sold in 1929 by John H. Kirby to the Curtis Airport Corporation exceed $210 per acre?
5. Did the promissory note of T. H. Bass for $25,000 payable to and held by John H. Kirby, dated November 21, 1917, become worthless in 1929?
6. Did the capital stock of the Braeswood Corporation become worthless in 1929?
7. Did stock of Vancouver Lumber Co. held by John H. Kirby on a cost basis of $184,904.19 become worthless in 1929 and was the sale of the same by Kirby in that year for $10 a bona fide sale, *861 entitling petitioner to the deductible loss claimed?
8. Was there in 1929 a bona fide sale by John H. Kirby for $500 of capital stock of Link Oil Corporation acquired by him after March 1, 1913, at a cost of $67,900, entitling petitioner to a deduction of one-half of a loss of $67,400 in computing petitioner's taxable income for 1929?
9. Was any taxable gain realized by the petitioner upon the liquidation distribution of the Texas Banking & Investment Co.? If any gain was realized, was it realized in 1928 or 1929 and what value should be given to the real estate of the Gladys City Oil, Gas and Manufacturing Co. in determining the amount of the liquidating gain.
FINDINGS OF FACT.
It is stipulated in part:
At all dates material in this proceeding John H. Kirby and Petitioner were husband and wife living together and domiciled in the State of Texas. For the calendar years 1927, 1928 and 1929, they filed separate income tax returns, *580 including in each one-half (1/2) of what they claimed was their total community income. The returns of each were made on the basis of actual receipts and disbursements. All income and losses involved in this case are community*862 income and losses.
Facts as to Issue No. 1.
Some years prior to the year 1912 John H. Kirby and some other Americans, for the purpose of acquiring certain property in Mexico, secured from the State of Arizona charters of incorporation for the Buena Fe Mining Co. and the Kirby Development Co. The Buena Fe Mining Co. bought some property in the State of Jalisco, Mexico, on which a silver mine in El Toro Mountains, about 90 miles from San Luis Potosi (the nearest city), had been operated for many years. The Kirby Development Co. also acquired certain property or rights covering veins running through the mountains.
After acquisition of the above-mentioned properties, their development was begun and ore in abundance and of value was found. A power plant, a chile mill, and cyanide tank were installed, and bullion was being turned out on a profitable basis when the Madero insurrection in 1912 broke out.
On May 26, 1912, some Mexican insurrectos took by force what money the Buena Fe Mining Co. had on hand, robbed its store and supply house, and caused an explosion of dynamite in the mine shaft, destroying it and the chile mill.
The American owners, under advice of our*863 Government, left Mexico, but before doing so filed with the Mexican Government at Mexico City and with the Secretary of State at Washington, D.C., a statement of damages in the amount of approximately $570,000 alleged to have been sustained on account of the acts and injuries above described. The Buena Fe Mining Co. employed reputable and able lawyers to represent it in the presentation of its claim for said damages, in the meantime paying the heavy taxes imposed on its property in the belief that it was advisable to try to hold on to it, thinking that a stable government might be established in Mexico. In 1927, after a full discussion of the affairs of the company, after consideration of the opinions of its attorneys as to chances for redress or relief, the unfavorable attitude of the Mexican Government toward foreign ownership and development of mining properties, the fact that the company had no other assets or properties in Mexico, that heavy taxes were required to be paid, that it then had outstanding liabilities amounting to $147,184.74 and that its funds were exhausted, the directors, in pursuance of the action of stockholders, unanimously resolved to pay no more taxes to*864 the Mexican Government for the right to do business therein, to abandon all operations in the Republic of Mexico, and to discontinue all business under its charter in the Republic of *581 Mexico and elsewhere. After passing the aforesaid resolution by its directors, the company almost immediately ceased operations, stopped paying taxes on its property in Mexico, paid no further franchise tax for the purpose of maintaining its charter in existence in the State of Arizona, and abandoned its said properties and made no further efforts to prosecute its claim for damages. After the abandonment of the properties and the ceasing of operations, all of which took place in 1927, the stock of the Buena Fe Mining Co. was of no value.
It was stipulated:
* * * it is agreed and stipulated that prior to May 26, 1912, the date of the damage done by Mexican insurrectos to the Buena Fe mine there had been loaned and advanced by John H. Kirby to Buena Fe Mining Company various sums, aggregating at that date in excess of repayments the sum of $77,447.63; and that advancements and repayments or credits thereafter made from time to time, by John H. Kirby to Buena Fe Mining Company were, * * *865 * aggregating net advance after May 26, 1912 and to and including December 22, 1926, in the sum of $69,737.11; and making the total amount due on December 22, 1926, the sum of $147,184.74. * * * In 1927 John H. Kirby charged off the $147,184.74 balance due him by Buena Fe Mining Company on said account. Respondent in determining Petitioner's taxable income for 1927 disallowed deduction for the account so charged off.
* * * agreed and stipulated that prior to May 26, 1912, * * * there had been loaned and advanced by John H. Kirby to Kirby Development Company sums aggregating on May 26, 1912, a net balance of $18,166.23; and thereafter, and to an including March 14, 1927, additional advances were made * * * in the aggregate sum of $436.44, making a total due to John H. Kirby by Kirby Development Company on March 14, 1927, $18,602.67. This account John H. Kirby charged off in 1927. * * * In determining Petitioner's taxable income from 1927 Respondent disallowed deduction for the said account.
* * * agreed and stipulated that the Buena Fe Mining Company stock involved was acquired prior to May 26, 1912 by John H. Kirby at a cost of $82,393.30, and was at all times material in*866 this proceeding community property of Petitioner and her husband, John H. Kirby; and that the Kirby Development Company stock involved was acquired prior to May 26, 1912, by John H. Kirby at a cost of $25,000.00 and was at all times material in this proceeding community property of Petitioner and her husband John H. Kirby.
Facts as to Issue No. 2.
The Southern Tariff Association was a voluntary association of individuals, industries, and other associations organized in 1920, with John H. Kirby as president, for the purpose primarily of working to obtain a repeal of the free list that had been enacted in the Underwood Tariff Bill, putting things farmers produced on the free list. The association was active all over the South, annual meetings being held in various southern cities. Members appeared before the Ways and Means Committee of the House in efforts to get schedules that they considered would be fair to cattlemen, wool growers, rice *582 farmers, cotton farmers, cottonseed oil mills, peanut planters, etc. Expenses of speakers and of important men attending various conferences, appearing before the Ways and Means Committee and such like, had to be paid and required*867 considerable money. The method of support for the organization was by voluntary contributions from the subscribers or members. The association continued its active existence and labors along lines indicated until the passage in 1926 of the Fordney-McCumber Tariff Bill. In 1927 the association was without funds and its activities ceased. Prior to the enactment of the Fordney-McCumber Tariff Bill nearly all checks for benefit of the association were made payable to John H. Kirby as president. After enactment of the bill activities of the association were largely before the United States Tariff Commission, and the association opened an office in Washington, D.C., and a great many contributions were sent to and spent through that office. John H. Kirby, who had theretofore contributed, made further contributions and was the receipts and disbursements agent.
When the association ceased operations in 1927, there were payments or advances that had been made by John H. Kirby for its benefit amounting to $12,370.56, which had not been refunded or repaid him. The association had no money with which to pay the same and the amount was in that year charged off by Kirby as a bad debt and*868 one-half the amount thereof was taken as a deduction in the income tax return of the petitioner for that year and disallowed by the respondent. An additional advance of $2,875, for which there had been no reimbursement of John H. Kirby, had been made by him for the benefit of the association and, the association being without funds to pay same, said amount in 1927 was charged off by Kirby as a bad debt loss, and one-half thereof was taken as a deduction in petitioner's income tax return for that year and likewise disallowed by respondent as a deduction. Said disallowances were assigned as error.
There is no evidence that the above mentioned advances were made at the instance or request of the association or its officers.
In 1928 the association again became active, raised some money, and carried on for a time. In that year John H. Kirby, at the request of the proper officers of the association made advances to it, or for its account, paying some of its bills. The aggregate amount so advanced was $3,906.72. There were no funds of the association and no prospects of any out of which John H. Kirby might be reimbursed, and in 1928 he charged the amount off as an uncollectible*869 or worthless debt. One-half thereof was taken as a deduction by petitioner in her 1928 income tax return, but it was disallowed by the respondent and is assigned as error. Kirby put his own contributions into the association. The debt claimed includes his contributions. *583 Kirby made demand on the treasurer in Washington for repayment of the payments he had made on behalf of the organization. The Tariff Association never authorized the procurement of loans from him.
Facts as to Issue No. 3.
It has been stipulated:
* * * it is agreed and stipulated that in 1927 John H. Kirby sold for $167,950.00 one hundred and seventy bonds of Kirby Lumber Company of the face value of $170,000.00, and Petitioner in her income tax return for 1927 claimed deduction for loss on such sale in the sum of one-half of $2,050.00, which deduction Respondent disallowed, asserting that Petitioner made a profit on the transaction in the sum of one-half of $26,850.00 and included that amount in his computation of Petitioner's taxable income for 1927. In 1928 John H. Kirby sold for $196,826.82, two hundred bonds of Kirby Lumber Company of the face value of $200,000.00, and Petitioner, in*870 her income tax return for 1928 claimed deduction for loss on said sale in the sum of one-half of $3,173.18, which deduction Respondent has disallowed, asserting that Petitioner made a profit on the transaction in the sum of one-half of $30,826.82 and included that amount in his computation of Petitioner's taxable income for 1928. In 1929 John H. Kirby sold for $52,920.00 fifty-four bonds of Kirby Lumber Company of the face value of $54,000.00, and Petitioner in her 1929 income tax return claimed deduction for loss on said sale in the sum of one-half of $1,080.00, which deduction Respondent has disallowed, asserting that Petitioner made a profit on the transaction in the sum of one-half of $8,100.00 and included that amount in his computation of Petitioner's taxable income for 1929. The said bonds were acquired by John H. Kirby in 1923 in exchange for surrender of preferred stock of Kirby Lumber Company with accumulated dividends and premium thereon. The preferred stock was acquired by John H. Kirby prior to March 1, 1913, at a cost of par ( $100 per share), and on March 1, 1913 had a value not less than par, exclusive of unpaid dividends and premium. The preferred stock was preferred*871 over common in distribution of assets and dividends at the rate of 7% per annum, cumulative, and, provided that it might be called and retired at any time at par plus $5 per share premium plus all dividends not previously paid. In 1923 Kirby Lumber Company, upon authorization of a meeting of stockholders called for the purpose, after due notice of the meeting and the purpose thereof, adopted and carried into effect a plan for retirement of the entire issue of $5,000,000.00 preferred stock then outstanding in exchange for Fifteen Year 6% First Mortgage Gold Bonds of the Company in face amount equal to the par value of the stock to be retired plus the $5 per share premium, plus unpaid accumulated dividends on the preferred stock. The directors duly ordered and authorized the payment of the eighteen unpaid accumulated dividends on the preferred stock, aggregating $126.00 per share; and holders of preferred stock, including John H. Kirby, surrendered the stock and received for each share and for the accumulated dividends and premium ( $5) thereon, $231.00 in face amount of the new 6% bonds. The bonds involved in this controversy were of said issue and so acquired by John H. Kirby.
*872 On February 28, 1913, assets of Kirby Lumber Company exceeded liabilities (excluding only $5,000,000.00 preferred and $5,000,000.00 common capital stock) by not less than the sum of $14,485,626.46. The Company's net earnings after 8february 28, 1913 to date of conversion of preferred stock into bonds in 1923, *584 were $3,029,833.54, of which it distributed as dividends on said preferred stock, in 1918 $116,725 cash and on December 30, 1922 $848,735, leaving at date of conversion of preferred stock into bonds in 1923, $2,064,373.54 undistributed earnings since February 28, 1913; on the basis of which John H. Kirby and Petitioner, in their returns for 1923, included as taxable dividends $41.28 of $231each (face value) of bonds received by John H. Kirby in exchange for preferred stock and dividends and premiums thereon.
In her income tax returns for the above years petitioner claimed a capital net loss from sales in the respective years of Kirby Lumber Co. bonds.
The respondent determined, as indicated in deficiency notice, that said bonds in 1923 had a value of 83 percent of par and on that basis a profit resulted from each sale.
Facts as to Issue No. 4.
It has*873 been stipulated:
* * * it is stipulated and agreed that John H. Kirby in 1929 received for the land involved the total sum of $546,600.00 as set out in the Petition herein. The cost of the tracts acquired by John H. Kirby after March 1, 1913 was as follows:
| 31.52 acres in the P. W. Rose Survey cost | $7,096.50 |
| 8.44 acres in the J. Hamilton Survey cost | 2,278.80 |
| 3.97 acres in the J. Hamilton Survey cost | 1,072.56 |
The cost of the tracts acquired by John H. Kirby before March 1, 1913, was as follows:
| 218.04 acres in J. Walters Survey cost | $35,022.40 |
| 193.53 acres in P. W. Rose Survey cost | 7,148.50 |
After March 1, 1913, John H. Kirby expended on improvements to said property the following amounts:
| During 1917 - For Waterwell, Buildings etc | $3,782.40 |
| During 1918 - For improvements | 214.22 |
| During 1919-1920 - For Drainage, fences and other improvements | 7,380.66 |
| During 1924 - For Houses, Well, Improvements | 248.60 |
| Total | $11,625.88 |
In determining Petitioner's taxable income for 1929, Respondent has included as taxable gain the entire sum of one-half of $546,600.00 received for sale of the property, without making any deduction*874 for cost or March 1, 1913 value of any of the land sold.
The 218.04 acres and 193.53 acres described above were purchased by John H. Kirby on December 23, 1912, and November 22, 1905, respectively.
At the hearing herein a number of witnesses, some qualified as experts, testified with respect to the March 1, 1913, fair market value per acre of the aforesaid two large acreage tracts separately considered and also considered as one tract or body of land. The testimony *585 is conflicting, ranging - as to some of the acreage - from $175 per acre to $850 per acre. However, after considering all the evidence touching the March 1, 1913, fair market value per acre of said two tracts (average price per acre), we find the same to be $350 per acre.
All five acreage tracts described above were sold in 1929 by John H. Kirby to the Curtis Airport Corporation for the aforesaid sum of $546,600.
Facts as to Issue No. 5.
Respondent, in computing petitioner's income for 1929, disallowed a claimed deduction in the sum of one-half of $25,000, alleged uncollectible or worthless note of T. H. Bass. The note was dated November 21, 1917, made payable to order of John H. Kirby, six*875 months after date, bearing 6 percent interest from date, with 250,000 shares, of the par value of $1 each, of the capital stock of the Texas-Arizona Copper Co. as security. In the event of default in payment of the note at maturity, the holder thereof was authorized to sell said shares at public or private sale and apply proceeds to the payment of expenses of sale and satisfaction of note.
T. H. Bass died in 1929, having at that time no assets of any consequence. Prior to 1928 his financial condition was "up and down." The record does not disclose that any effort was made to collect the note when due nor that any interest was ever paid thereon. The record shows that the stock of the Texas-Arizona Copper Co. was worthless in 1929, may have been so before that date, and that John H. Kirby may have known it to be so prior to that date. The note did not become worthless in 1929.
Facts as to Issue No. 6.
It is agreed and stipulated:
* * * that after March 1, 1913, John H. Kirby acquired the Braeswood Corporation stock involved at a cost of $250,000. On her return Petitioner deducted under the heading of "worthless stocks charged off" one half of $237,500.00 with respect*876 to said stock, and stated that she charged it down to 5% of cost. The Commissioner has disallowed the deduction claimed.
Braeswood Corporation was a Texas corporation that acquired a large area of land on Main Street and Bellaire Boulevard, Houston, Texas, for the purpose of putting on a high-grade residence subdivision known as Braeswood. It had an authorized capital of $750,000. John H. Kirby was a stockholder, owning $250,000 of the stock, and was a director in 1929. In 1929 the sales of lots in the subdivision were disappointing and not such as to enable the corporation to meet the obligations it had assumed in the purchase of the property and its improvements. The aggregate of the mortgages on the *586 property at the time of its purchase was large. Thereafter, some were foreclosed and satisfied. There was in 1929 also some unsecured indebtedness against the corporation, though the amount thereof is not shown. The amount and value of the assets of the corporation in 1929 are not shown. At the time of the hearing herein, in 1935, the corporation was no longer in operation, having been formally dissolved and all its properties disposed of, but the date when it*877 went into liquidation is not shown. It had no substantial amount of cash on hand in 1929 and was in need of such at that time. The evidence fails to show that the stock of the corporation became worthless in 1929 and had no value as of December 31, 1929.
Facts as to Issue No. 7.
It is agreed and stipulated:
* * * that after March 1, 1913, John H. Kirby acquired Vancouver Lumber Company, Ltd., stock, involved at a cost of $184,904.19. In determining Petitioner's taxable income for 1929 Respondent has disallowed the deduction claimed for loss on alleged sale of said stock in 1929.
This issue is not discussed in the respondent's brief.
The Vancouver Lumber Co., Ltd., conducted its business in the city of Vancouver, in the province of British Columbia. John H. Kirby owned more than 50 percent of the stock of the company and knew the condition of its affairs in 1929. The stock of the company had some value in 1928, but became absolutely worthless in 1929 and Kirby so knew. However, his son-in-law, J. F. B. Rawcliffe, now deceased, bought the aforesaid stock from him, paying him $10 therefor, stating he would take "the chance" of its being worthless, notwithstanding*878 Kirby had told him it was worthless. The evidence shows the sale to Rawcliffe was a bona fide sale resulting in a loss to Kirby and petitioner of the difference between its cost and its sale price, $10.
Facts as to Issue No. 8.
It is agreed and stipulated:
* * * that after March 1, 1913, John H. Kirby acquired the Link Oil Corporation stock involved at a cost of $67,900.00. In determining Petitioner's taxable income for 1929, Respondent has disallowed the deduction claimed for loss on alleged sale of said stock in 1929.
The evidence shows that in 1929 John H. Kirby made a sale of the stock, which he thought of little value, to E. V. Clark, an employee of the Kirby Lumber Co. for $500, which Clark promptly paid, having prior thereto investigated its value and reached the conclusion that the stock was worth more than he was paying for it. Clark prepared the returns of petitioner and her husband in 1927 and in their income tax returns for that year wrote off the cost *587 of the said stock. In the brief for respondent there is no discussion of this question.
Facts as to Issue No. 9.
The facts under this issue, with the exception of the value of the assets*879 and stock of the Gladys City Oil, Gas & Manufacturing Co., are stipulated.
It is agreed and stipulated:
* * * that Respondent has included alleged taxable profit on liquidation of Texas Banking & Investment Company in computing Petitioner's taxable income for 1928, and also in computing Petitioner's taxable income for 1929 - in the sum of one-half of $1,321,182.54 alleged community profit to Petitioner and her husband from said liquidation. * * *
The Texas Banking & Investment Co. was a Texas corporation and its charter expired by lapse of time on February 1, 1925. At and immediately prior to said date, R. E. Jordan was its president and J. F. B. Rawcliffe and John H. Kirby, with others, were directors.
At and immediately prior to February 1, 1925, the said company was the owner of 39 shares of the capital stock of Nona Mills Co. (a corporation), 491 shares of the capital stock of the Oakwood Realty Co. (a corporation), and 270 shares (of a total 540 shares outstanding) of capital stock of the Gladys City Oil, Gas & Manufacturing Co. (a corporation). None of the above-mentioned shares were sold during liquidation, and physical possession of all shares was delivered to*880 John H. Kirby during the latter part of February 1929, in which month transfer of the stock to Kirby was made on the records of the several corporations and new certificates in his name issued and delivered to him. At February 1, 1925, and thereafter until aforesaid transfers were made, the stock stood in the name of J. F. B. Rawcliffe, trustee, except qualifying certificates of one share each of stock in the Gladys City Oil, Gas & Manufacturing Co. which were in the names of Rawcliffe and Kirby, respectively, who were at and before February 1, 1925, and thereafter until and including 1929, directors of that company.
At and immediately prior to February 1, 1925, Zelie L. Willison, wife of W. W. Willson, deceased, claimed actual ownership of all the outstanding (2,541) shares of the capital stock of the Texas Banking & Investment Co. Each of the five directors thereof, of which John H. Kirby was one, held at and before February 1, 1925, a qualifying share of stock of which Zelie L. Willson claimed to be the actual and beneficial owner. None of said directors during the aforesaid time owned any other stock in the Texas Banking & Investment Co.
On or about June 6, 1927, a written*881 agreement was entered into between Mrs. Willson and Kirby, by and under which she sold, transferred, conveyed, and delivered to John H. Kirby all her right, *588 title, and interest in and to the capital stock of the Texas Banking & Investment Co. and in and to its properties and assets and in and to certain properties remaining undisposed of and described in written agreement between W. W. Willson and John H. Kirby dated November 12, 1918, which, however, is not filed herein nor shown in evidence.
In consideration for the stock and properties so sold, transferred, conveyed, and delivered to Kirby, he paid Mrs. Willson $10,000 in cash and executed and delivered to her his two promissory notes for $40,000 and $50,000, due in six and twelve months after date, respectively, both bearing 7 percent interest from date.
Among the properties and assets of the Texas Banking & Investment Co. sold, transferred, and delivered to Kirby by and under aforesaid agreement were the 270 shares of capital stock of the Gladys City Oil, Gas & Manufacturing Co., a Texas corporation which had certain holdings at Spindletop, in Jefferson County, Texas, from which oil was produced. As further*882 consideration for the properties sold and transferred to Kirby, he, in part, obligated himself, his heirs, executors, and administrators:
* * * to pay to the seller from time to time, amounts equal to one-fourth (1/4) of the total dividends on its entire capital stock declared and paid by said Gladys City Oil, Gas & Manufacturing Company out of oil and gas, or the proceeds thereof, produced from and after May 31, 1927, from its present holdings at Spindletop, in Jefferson County, Texas, the obligation of the purchaser to make such additional payments to accrue as and when such dividends are declared and paid, and same to be paid by Purchaser to seller at said time; but this obligation upon the part of the purchaser is limited to such dividends as may be so declared and paid during the natural life of the seller, but should she die before fifteen (15) years from this date, then such payments shall be made to her heirs, devisees, assigns, or legal representatives, for such period as may intervene between the date of her death and May 31, 1942, at the expiration of which period or periods this obligation of the purchaser shall cease and he shall not be required to pay any amounts in*883 respect of or on account of dividends, if any, thereafter declared and paid out of such oil production. * * *
Mrs. Willson did not warrant the title to any of the properties sold and conveyed as aforesaid and Kirby was under the agreement to hold her "harmless against all court costs, attorneys' fees and other expenses in connection with litigation now pending or hereafter instituted involving the properties or any of them", and the consideration paid by Kirby or to be paid by him was not to "be abated or reduced in consequence of any judgment obtained" against the Texas Banking & Investment Co. Numerous other provisions not material to be here set out were embodied in the agreement between said parties.
Several persons, other than Mrs. Willson, were at and before the execution of the aforementioned agreement between her and Kirby, asserting that they were, at and prior to February 1, 1925, and thereafter, *589 owners of certain shares (to wit, 231 shares in all) of stock of the Texas Banking & Investment Co. and asserted their rights to a share in the assets of said company. Included among the number making such claims were the following: George W. Carroll and his children, *884 who during or in 1927 filed suit in the District Court of Jefferson County, Texas, against the Gladys City Oil, Gas & Manufacturing Co., Texas Banking & Investment Co., the president and directors thereof (naming them) and Zelie L. Willson, J. N. Collier, and John H. Kirby, individually. John H. Kirby settled this suit by paying Carroll and his children $32,500 for an assignment of all their asserted interests dated April 23, 1928. J. H. Gaddy also made claim and on September 18, 1928, filed suit in the District Court of Jefferson County, Texas, against Zelie L. Willson, John H. Kirby, J. F. B. Rawcliffe, and J. N. Collier. On December 11, 1928, Collier filed a plea of intervention, asserting his claim and interest. In said suit, also, on December 11, 1928, W. C. Gray filed a plea of intervention and thereafter, on February 7, 1929, joined by W. C. Averill, filed a voluminous amended plea in intervention, asserting the claims of W. C. Gray to 91 shares and W. C. Averill to 50 shares of stock of the Gladys City Oil, Gas & Manufacturing Co. and to assets of the Texas Banking & Investment Co., and, on behalf of themselves and other former stockholders of the Texas Banking & Investment*885 Co., seeking appointment of a receiver to hold and conserve its assets, also an order for an accounting, a writ of injunction against sale or disposition of 270 shares of stock of the Gladys City Oil, Gas & Manufacturing Co. and partition of assets of the Texas Banking & Investment Co., for damages, etc.
On this intervention, injunction writs issued on December 11, 1928, and February 9, 1929.
On January 21, 1929, J. N. Collier, in consideration of $17,000 cash paid him by John H. Kirby, executed and delivered to Kirby a transfer and assignment of all rights, interest or claims which he held or had in certificates and shares of stock of the Texas Banking & Investment Co., a Texas corporation, and of the Texas Banking & Investment Co., unincorporated, and of the Gladys City Oil, Gas & Manufacturing Co.; to all properties of every kind and character constituting assets of either of the above named companies; to all dividends paid or that might thereafter accrue or be paid on the stock of any of said companies; to all claims, demands, and causes of action which he had or ever had against any of said companies and against R. E. Jordan, W. N. Sangster, E. D. Bloxsom, "J. F. Rawcliff" *886 and John H. Kirby or any of them, individually or as officers or directors of the Texas Banking & Investment Co., or as statutory trustees in liquidation of said corporation, and also to all claims or causes of action which he had or ever had against *590 W. W. Willson, deceased, and his estate and against his surviving wife, Mrs. "Zellie" (Zelie) L. Willson.
On January 21, 1929, J. H. Gaddy, in consideration of $5,000 cash paid him by John H. Kirby, executed and delivered to Kirby an assignment and transfer of a character similar to that last above described, covering and conveying rights, interests, claims, and causes of action which the said Gaddy held or had in any of the properties constituting assets of any of said companies or in the stock thereof.
Settlement with W. C. Gray and W. C. Averill was made on or about February 16, 1929, on which date W. C. Gray and W. C. Averill and others, including their attorneys, in consideration of $15,000 cash paid to them by John H. Kirby, executed and delivered to John H. Kirby an assignment and transfer, dated February 16, 1929, of tenor and character of the last two preceding assignments above described. On February 18, 1929, a*887 decree was duly entered in the beforementioned suit showing settlement of same.
N. A. Cravens asserted claim to ownership of part of the stock (10 shares) and assets of the Texas Banking & Investment Co., but no suit was filed by him as John H. Kirby settled the claim by paying Cravens $2,250, in consideration of which Cravens, under date of January 21, 1929, executed and delivered an assignment to Kirby of the same tenor and character as the other transfers and assignments last above described.
On or about December 16, 1929, Robert E. Jordan, as last president of the Texas Banking & Investment Co. and its last board of directors, executed and delivered to John H. Kirby, for the recited consideration of $1 paid them by Kirby and in further consideration of Kirby being the sole stockholder of the Texas Banking & Investment Co., and as such, "all debts of said Company having been paid", entitled to all the properties and assets of said company in the hands of said parties and as liquidating trustees, transferred and assigned unto John H. Kirby all assets of the company in their hands as liquidating trustees thereof.
It is agreed and stipulated:
Gladys City Oil, Gas & Manufacturing*888 Company, on February 1, 1925, and thereafter to and including the year 1929, owned approximately 1700 acres of land about five miles southerly from Beaumont in the Veatch Survey, approximately 500 acres of which was under mineral leases to Yount-Lee Oil Company and Gulf Production Company, both of which were during said time producing oil from said properties. Their oil production activities and facilities completely and exclusively occupied, in 1928 and 1929, the surface of approximately 100 acres of said land.
* * *
(1) The value of the mineral interests of Gladys City Oil, Gas & Manufacturing Company in land covered by the lease to Yount-Lee Oil Company was *591 (a) on February 1, 1928, $950,000, (b) on December 31, 1928, $716,619.76, (c) on February 1, 1929, $680,000, and at subsequent dates in 1929 not exceeding $680,000;
(2) The value of the mineral interest of Gladys City Oil, Gas & Manufacturing Company in land covered by the lease to Gulf Production Company was (a) on February 1, 1928, $57,151.35 in respect of royalty, plus $35,000 in respect of rental, (b) on December 31, 1928 $45,750 in respect of royalty plus $27,000 in respect of rental, and (c) at all times*889 in 1929 not exceeding the sums stated at December 31, 1928;
(3) The value of 39 shares of capital stock of Nona Mills Company at all times during 1928 and 1929 was $129.7616 per share, aggregating $5,060.70;
(4) The value of 491 shares of capital stock of Oakwood Realty Company, at all times during 1928 and 1929, $1was per share, aggregating $491.00;
(5) Notes receivable in the aggregate face amount of $21,450.00, and taken at that value by Respondent in determining Petitioner's alleged gain from liquidation of Texas Banking & Investment Company were in fact worthless at all times in 1928 and 1929.
The petitioner and respondent introduced witnesses at the hearing who testified with respect to the value in 1928 and 1929 of the aforesaid 1,700 acres of land - exclusive of the value of the mineral interests therein covered by leases to the Yount-Lee Oil Co. and the Gulf Production Co. mentioned above.
The testimony was conflicting, witnesses differing greatly as to the values which they placed on the land, exclusive of said mineral interests. However, after carefully considering all the factors entering into the determination of the question, we find the average value per*890 acre of the 1,700 acres, exclusive of said mineral interests, to have been $287.50 per acre during the years 1928 and 1929, or $488,750, which, added to $752,750, the stipulated value of the mineral interests after February 1, 1929, gives $1,241,500, one-half of which, or $620,750, we find to have been the value of the 270 shares of stock of the Gladys City Oil, Gas & Manufacturing Co.
From and after February 1, 1928, to and including December 31, 1929, the Gladys City Oil, Gas & Manufacturing Co. paid, in respect of the 270 shares of capital stock in that company owned at and before February 1, 1925, by the Texas Banking & Investment Co., dividends in 1928 and 1929 in the respective amounts of $168,750 and $140,400.
It is agreed and stipulated:
* * * Said dividends were respectively paid by the Gladys City Oil, Gas & Manufacturing Company, to J.F.B. Rawcliffe in respect of the qualifying single share in his name, to John H. Kirby in respect of the qualifying single share in his name, and to J.F.B. Rawcliffe, Trustee, in respect of the 268 shares standing in that name but the entire amount of all such dividends was placed to credit of the Liquidating Trustees of Texas Banking*891 & Investment Company, who on or about October 1, 1928, out of accumulated dividends paid to John H. Kirby individually the sum of $400,000, which is the sum of $400,000 cash included by the Respondent in his computation of alleged taxable gain of Petitioner and her husband, John H. Kirby, from liquidation of assets of *592 Texas Banking & Investment Company. The balance remaining after such payment to John H. Kirby, with subsequent receipts for account of the Texas Banking & Investment Company Liquidation, aggregated at December 31, 1928, $196,150.45, which was at said date in the custody of John H. Kirby, not individually but as one of the former directors and depositary of the funds of said liquidation. Said amount ($196,150.45) was included in the sum of $357,720.05 shown in Petitioner's 1929 income tax return as "Dividends Received" by Petitioner and her husband, John H. Kirby, from "Texas Banking & Investment Company." In determining the amount of taxable profit of Petitioner and her husband, John H. Kirby, from liquidation of Texas Banking & Investment Company, Respondent has included said sum of $196,150.45 - both as to 1928 and as to 1929 - and has excluded from 1929*892 taxable dividend income of Petitioner one-half of said sum of $357,720.05.
Pursuant to the provisions of the aforesaid assignment of June 6, 1927, from Zelie L. Willson to John H. Kirby, the latter thereafter, to and including the year 1929, paid to the former out of dividends from the Gladys City Oil, Gas & Manufacturing Co., in 1927, the sum of $49,950; in 1928, the sum of $91,125; and in 1929, the sum of $70,200.
Except as and to the extent that the same were included in the sum of $400,000 and in the sum of $196,150.45 mentioned above, the respondent has not, in determining petitioner's taxable income for 1928 and 1929, included any amount in respect of the dividends paid between February 1, 1928, and December 31, 1929, by the Gladys City Oil, Gas & Manufacturing Co. heretofore referred to.
It is agreed and stipulated:
At February 1, 1928, there was included in assets of Texas Banking & Investment Company, real estate of the value (at that date) of $42,500.00, which the Trustees in Liquidation sold in July and September 1928, for $42,500.00. At February 1, 1928, there were also outstanding liabilities of Texas Banking & Investment Company in the sum of $20,500.00, which*893 were paid thereafter during 1928. The $42,500.00 proceeds of said realty, less the amount of said $20,500.00 liabilities, was included in the sum of $196,150.45 hereinabove mentioned.
Accounts receivable in the sum and value of $389,493.78 at February 1, 1928, are also included in the $400,000.00 and $196,150.45 hereinabove mentioned.
OPINION.
DISNEY: 1. The record indicates that prior to 1927 the prospect of realizing something on the claim for damages filed with the Mexican Government was not hopeless or without reason. Not until in that year did prosecution of said claim and all operations of the Buena Fe Mining Co. cease. Not until then did the company stop paying taxes on its Mexican property and abandon it. Then and not till then did its stock become worthless.
It is shown by the agreed stipulation that prior to May 26, 1912, the date when insurrectos damaged properties of Buena Fe Mining Co., John H. Kirby had loaned and advanced to the company sums *593 aggregating at that date in excess of repayments the sum of $77,447.63 and that net advances made by Kirby to the company after May 26, 1912, to and including December 22, 1926, amounted to the sum of*894 69,737.11, making total net advances of $147,184.74. This amount Kirby charged off in 1927 as a bad or worthless debt and the respondent in determining petitioner's taxable income for 1927 disallowed any deduction for the account so charged off.
In the light of the record herein, we are of the opinion and hold that John H. Kirby was justified in charging off as a bad debt in 1927 said sum of $147,184.74 and the respondent in determining petitioner's taxable income for 1927 erred in not allowing as a deduction one-half of that amount.
It is agreed and stipulated that prior to May 26, 1912, John H. Kirby had loaned and advanced to the Kirby Development Co. sums aggregating at that date a net balance of $18,166.23 and thereafter, to and including March 14, 1927, made additional advances amounting to $436.44, or a total at March 14, 1927, of $18,602.67, which amount Kirby charged off in 1927 as a bad debt or account.
In determining petitioner's taxable income for 1927, the respondent disallowed any deduction for said account, and in our opinion, and we so hold, he did not commit any error.
The evidence relative to the property in Mexico of the Kirby Development Co. is not*895 the same as that concerning the Buena Fe Mining Co. What damage, if any, was done its property by Mexican insurrectors on May 26, 1912, or any other time is not alleged nor shown. Its property is not shown to have been abandoned or become of little or no value, nor its stock to have become worthless in 1927, and the evidence as presented in the record does not warrant a charge-off as a worthless account or debt of the $18,602.67 as such. The respondent is sustained as to the Kirby Development Co. stock.
The agreed stipulation shows that the Buena Fe Mining Co. stock involved was acquired prior to May 26, 1912, by John H. Kirby at a cost of $82,393.30 and that the Kirby Development Co. stock was also acquired by Kirby prior to that date and at a cost of $25,000, and that both stocks were at all times material in this proceeding community property of petitioner and her husband, John H. Kirby.
As above indicated, the record shows that the stock of the Buena Fe Mining Co. became worthless in 1927, but fails, in our opinion, to show that the stock of the Kirby Development Co. also became worthless in that year. We, therefore, hold that the petitioner, in her 1927 income tax return, *896 is entitled to a deduction of one-half the cost of the Buena Fe Mining Co. stock, but that in her 1927 income tax return she is not entitled to any deduction on account of the cost of the Kirby Development Co. stock, the record not showing that it became worthless in 1927.
*594 2. The Southern Tariff Association was a voluntary association, the purposes and efforts of which are duly set forth in our findings of fact.
The advances made to the association by John H. Kirby and disallowed as deductions by the respondent were made without promise of repayment and with knowledge on his part of the financial condition of the association. No evidence indicates that he was requested by the association to advance or loan money or pay expenses, except that the advances by payment of bills in 1928 were at the request of officers of the association. The association never authorized the procurement of loans from him. We can discern no obligation to repay in these transactions. Therefore, they are not deductible as bad debts. *897 . They partake of the nature of contributions or donations rather than of debt. The amounts claimed included unnamed amounts of voluntary contributions by Kirby. Viewed as contributions, the amounts are not within any statutory classification of allowable deductions.
The activities of the association were for the purpose of procuring the repeal of a statute of the United States and contributions for such a purpose are not allowable as deductions from gross income. ; ; . We therefore conclude and hold that, whether regarded as advances or as contributions, the amounts in question are not deductible.
3. Whether the petitioner realized a taxable gain in each of the years 1927, 1928, and 1929 as a result of sales in those years of bonds of the Kirby Lumber Co., is submitted for our determination on facts which have been stipulated and are set out in our findings of fact.
It is shown that the Kirby Lumber Co.'s preferred stock had a March 1, 1913, value of not less than*898 $100 per share (exclusive of unpaid dividends and premium) which was its cost to Kirby when acquired by him prior to 1913.
The accumulated unpaid dividends in 1923 of $126 a share plus a $5 per share premium aggregated $6,550,000, and the undistributed earnings accumulated since February 28, 1913, aggregated only $2,064,373.54, or the equivalent of a dividend of $41.28 a share, and in their returns for 1923 John H. Kirby and petitioner included as taxable dividends $41.28 of each $231 (face value) of bonds received by Kirby in exchange for preferred stock, dividends, and premiums thereon. The retirement of the preferred stock and receipt of bonds therefor in 1923, as stated, were pursuant to a plan adopted by the stockholders and directors of the Kirby Lumber Co. The payment of the dividend of $126 per share had been duly ordered and authorized by the directors of the company.
*595 The respondent in his deficiency notice determined that the value of the bonds in question in 1923 was 83 percent of par and that on such basis a profit, rather than a loss, resulted from the sale of said bonds in each of the years in issue. But in our opinion, and we so hold, this exchange*899 of stock for bonds was an exchange, to the extent that the bonds at face value were received to balance the par value of the preferred stock, in a recapitalization and therefore a reorganization, in which neither gain nor loss was recognized, within the provisions of the Revenue Act of 1926, section 203(b)(2) 1 (and section 112(b)(3) of the 1928 Act, identical therewith), and section 203(h)(1)(C), Act of 1926 2 (identical with section 112(i)(1)(C) of the 1928 Act). Clearly, the Kirby Lumber Co. was a party to a reorganization under section 203(h)(2), Act of 1926, 3 and section 112(i)(2) of the 1928 Act. In this connection, see 375 ; ; ; affirmed by mandate, Jabuary 14, 1936 (not reported); . Therefore, as to each $100 face value of bonds (of each $231) the basis to be used is "the same as in the case of the property exchanged * * *." Section 204(a)(6), Act of 1926 4 (identical with section 113(a)(6), Act of 1928). The parties have stipulated that the basis of the property*900 exchanged, namely, the preferred stock, was $100 per share.
*901 *596 Regarding each $126 face value of bonds (of each $231) the basis to be used is "cost." Sec. 204(a), Act of 1926, and sec. 113(a), Act of 1928. That portion of the bonds that was acquired by petitioner and her husband as payment for the dividends declared does not come within any of the exceptions mentioned in section 204(a) and 113 (a), respectively. What was this cost? The cost, in our opinion, was the fair market value of each $126 (of each $231) of face value of bonds when received in 1923 in payment of the dividends declared on the preferred stock. Cf. . The petitioner having offered no evidence of such fair market value, none being stipulated, and respondent having determined that all of the bonds had a fair market value of 83 percent of par, we hold that such was their fair market value and therefore that the $126 face value of bonds had a fair market value in 1923, and a basis herein, of $104.58.
Kirby received, however, $231 face value of bonds in connection with each share of preferred stock, $5 face value of bonds being added because of the right to premium. As to this $5 worth of bonds, it*902 can not be said that there was any basis, in cost or otherwise, aside from the basis of the stock. The original investment of $100 in the stock was the consideration not only for the stock itself, but, as shown by the contract embodied in the stock certificate, was consideration for the right to receive a $5 premium. Therefore, when in 1923 Kirby received, in addition to $100 in bonds for the stock certificate, $5 in bonds for the premium right, it is apparent, and we hold, that the cost of stock is also the cost of the premium right, that is, that the $100 cost basis is the basis for $105 face value of bonds. Therefore each $231 worth of bonds has a basis of $204.58, being $100 for stock and premium right, and $104.58 value of right to dividend. This applies equally to all of the bonds acquired by Kirby and sold in 1927, 1928, and 1929; and, all the bonds being upon the same basis, there is no distinction to be made between the sales in the different years. We hold that the basis of the Kirby Lumber Co. bonds sold in each of the taxable years is 204.58/231 of face value, and should be so computed. This fraction reduced to a decimal is .885627705, and we determine gain computed*903 as follows:
| 1927 | 1928 | 1929 | |
| Amount realized | $167,950.00 | $196,826.82 | $52,920.00 |
| Basis (.885627705 of par) | 150,556.71 | 177,125.54 | 47,823.90 |
| Gain in each year | 17,393.29 | 19,701.28 | 5,096.10 |
4. The question for our determination under this issue is entirely one of fact. We are of the opinion and hold that the average fair *597 market value per acre of the aforesaid two tracts of land, 218.04 acres and 193.53 acres, at March 1, 1913, was $350 per acre and the profit, arising from their sale in 1929 and from the sale of the three small tracts - the cost of which is stated in our findings of fact - to the Curtis Airport Corporation, all for the sum of $546,600, should be recomputed on the bases of values herein found or stipulated.
5. In view of the facts disclosed by the record with respect to this issue, we are of the opinion and hold that the respondent did not err in disallowing the deduction claimed by petitioner. While the record shows that the $25,000 T. H. Bass note, and the 250,000 shares of the capital stock of the Texas-Arizona Copper Co. as security were worthless in 1929 when Bass died, leaving no assets, it does not show that*904 both the note and security became worthless only in 1929 and that it was not until then that Kirby so knew. The provisions in the note relative to action that might be taken by Kirby in the event Bass defaulted in the payment of the note when due; the date of the note, November 21, 1917; and the fact that no effort is shown to have been made to collect note or any interest thereon or to sell the security, stock attached as collateral, although even prior to 1928 Bass' financial condition was "up and down", considered in connection with entire record, convince us that the note and stock were worthless and so considered by Kirby prior to 1929, though not charged off until then.
6. The petitioner contends that the capital stock of the Braeswood Corporation became worthless in 1929 and that she is entitled to a deduction in the determination of her taxable income for that year on account thereof. In her income tax return for 1929 petitioner claimed one-half of a 95 percent loss on said stock, which respondent disallowed.
The record shows that there were mortgages on the property of the Braeswood Corporation at the time it was purchased and that thereafter, though at what dates*905 it is not shown, some were foreclosed and satisfied. It is shown that there was also some unsecured indebtedness against the corporation in 1929. What was the amount of the secured and unsecured indebtedness and what the value of the assets of the corporation either before or after the forclosure and satisfaction of some of the mortgages are not shown. The record does not disclose when the corporation went into liquidation and was formally dissolved, though such had taken place at the time of the hearing herein in 1935. In our opinion, and we so hold, the competent evidence adduced is not sufficient for us to determine that the stock of the Braeswood Corporation became worthless; fails to establish that it became absolutely worthless in 1929 as contended by petitioner. Therefore, we determine this issue in favor of the respondent.
*598 7. On this issue - whether or not the stock of Vancouver Lumber Co. held by John H. Kirby on a cost basis of $184,904.19 became worthless in 1929 and was disposed of by a bona fide sale for $10 in that year - we are of the opinion and hold that the evidence establishes that said stock became worthless in 1929 and the sale of the same*906 for $10 was a bona fide sale, the loss on the stock being the difference between cost and the $10 for which sold as contended by petitioner. Therefore, this issue is determined in favor of the petitioner.
8. That stock of Link Oil Corporation, costing John H. Kirby $67,900, was disposed of by bona fide sale for $500, thereby causing him and petitioner a loss of $67,400, is, in our opinion, established by the evidence. We determine this issue in favor of the petitioner.
9. The charter of the Texas Banking & Investment Co. expired by lapse of time on February 1, 1925, and its assets on that date consisted largely of capital stock of other corporations. At that time John H. Kirby was one of the directors of the company and under the law became one of the trustees in liquidation. No receiver was ever appointed.
The Revised Statutes of Texas in force in 1925 (see articles 1205 and 1206, Revised Statutes of Texas, 1911, as amended, and articles 1387-1391, Revised Statutes of Texas, 1925) provide, in part, that a corporation is dissolved by expiration of the time limited in its charter; that upon the dissolution, unless a receiver is appointed by some court of competent jurisdiction, *907 the president and directors or managers of the affairs of the corporation at the time of its dissolution shall be trustees of the creditors and stockholders, with power to settle the affairs, collect debts, and divide the moneys and other property among the stockholders after paying the debts; that the existence of every corporation may be continued for three years after its dissolution from whatever cause, for the purpose of enabling those charged with the duty to settle up its affairs; that, in case a receiver is appointed by the court, the existence of the corporation may be continued so long as may be necessary to settle suitably the affairs of the corporation; that, when no receiver has been appointed for said corporation, suit may be instituted on any claim against the corporation as though the same were not dissolved and judgment may be rendered accordingly, the assets of the corporation being liable for its payment.
The record shows that Mrs. Zelie L. Willson claimed to be the beneficial owner of all the outstanding shares of capital stock of the Texas Banking & Investment Co. and that on or about June 6, 1927, she disposed of the same and all interest she had in the assets*908 of that company to John H. Kirby upon the terms and conditions set out in our findings of fact.
*599 In behalf of the respondent it is contended that the Texas Banking & Investment Co. ceased to be a going corporation on February 1, 1925, on account of the expiration of its charter; that, under the express terms of the Texas statutes, the legal entity of the corporation in process of dissolution was continued for the purpose of distributing its assets among creditors and stockholders and for purposes of suit (citing ), and that the trustees should have concluded the liquidation on or before February 1, 1928, asserted to be the basic date for determination of gain or loss in the liquidation.
Briefly stated, it is insisted for respondent that John H. Kirby, on February 1, 1928 - three years after the expiration of the charter of the Texas Banking & Investment Co. - constructively received the assets then remaining in the hands of the liquidating trustees, which assets consisted of cash and shares of corporate stock, the value of such stock, with one exception, being stipulated.
In petitioner's behalf said insistence*909 is denied. The record shows that the liquidating assets of the Texas Banking & Investment Co. (involved in the litigation hereafter mentioned) prior to 1929 were not actually reduced to possession of John H. Kirby nor set apart for him without substantial limitation or restriction as to time or manner of payment or use or enjoyment by him. The assets in question were, until well into 1929, in the control of the liquidating trustees, subject to restrictions on their handling, resulting from various claims and lawsuits instituted by various persons and injunctive writs issued in connection therewith. By stipulation it is shown that as late as February 1929 there were in effect injunctions restraining transfer of any of the Gladys City Oil, Gas & Manufacturing Co. stock or partition of its assets involved in said litigation. The adverse claims of Carroll, Gaddy, Collier, Gray, and others and the suits instituted by them to enforce their claims, as set forth in stipulations, negative receipt, either actual or constructive, of said assets (except as hereinafter indicated) by John H. Kirby prior to 1929. See Revenue Act of 1928, Regulations 74, arts. 332, 333; Grass Creek Oil & Gas*910 Co. v. M. S. Reynolds, Fed.Supp. (U.S. Dist. Ct., Wyoming, Sept. 13, 1933); cf. , and authorities therein cited.
Although in , it was held that after the lapse of three years from the date of dissolution of the corporation suits by or against the corporation could no longer be maintained, such ruling does not, in our opinion, cover or apply to the prosecution or defense by the liquidating trustees of suits based on claims by or against the corporation or its assets in *600 the circumstances shown herein, for in , it was said:
In Texas, our courts have long adhered to the doctrine that the assets of a dissolved corporation will be protected in equity as a trust fund for creditors and stockholders. In 1907 our Legislature began the enactment of remedial statutes. In 1919 other articles were added. As we construe our statutes, the Legislature has given to creditors and stockholders of a dissolved corporation the same broad measure of relief which equity would have afforded in the absence*911 of legislation. Article 1388, without any time limitation, authorizes these trustees to defend and maintain suits and generally settle up the affairs of the dissolved corporation. Under this article the assets pass into the hands of these trustees, and they are charged with definite duties and responsibilities. This very article authorizes the substitution of these trustees as parties plaintiff in the further prosecution of the case at bar.
Article 1389 is merely cumulative of article 1388. It but provides that, as an aid to the trustees in performing their duties as prescribed in article 1388, the corporation itself, for limited purposes only, may continue for three years, and even longer, under a receivership, if the court thinks it necessary. But, even if such continuance of the corporation itself for limited purposes is not had at the option of the trustees, they still have the right, and are charged with the duty, of defending and maintaining suits in the protection of the assets of the corporation.
The right of the trustees to carry on the litigation after the lapse of three years, affirmed by the Texas Commission of Appeals, was adopted by the Supreme Court of the*912 state, as the above citation shows.
We conclude and hold that John H. Kirby did not constructively receive the assets of the Texas Banking & Investment Co. at the end of three years from the expiration of its charter, but at the time of actual receipt of the properties and moneys distributed. ; ; ; . We hold that, with the exception of the $400,000 distributed on October 1, 1928, he received said assets after February 1, 1929; we hold further that all of said assets, including dividends, were received by him as liquidating dividends, and not as ordinary dividends, for they were all received through the liquidating trustees and, although the Gladys City Oil, Gas & Manufacturing Co. dividends were ordinary dividends so far as distribution by it was concerned, nevertheless they were paid to the liquidating trustees of the Texas Banking & Investment Co., who distributed same by way of liquidation. Therefore when received by John H. Kirby, these were liquidating*913 dividends. He was assignee of the rights of Mrs. Willson and all of her rights and assumed her status. She would, if she had not assigned to Kirby, have received these liquidating dividends, and whether Kirby be considered a stockholder or no, we conclude that he, with her status, *601 received these assets by way of liquidation dividends, and in exchange therefor, under section 115(c) of the 1928 Act. 5 The valuations which we have above found determine the amount of the liquidation dividends received by Kirby. We reject petitioner's contention that the contractual arrangement between Kirby and Mrs. Willson affects the value of the assets distributed in liquidation, for manifestly such contract goes only to the cost of the assets to Kirby, and does not affect the value of the liquidation distribution. The liquidating trustees were not parties to the contract between Mrs. Willson and Kirby. It was their duty to distribute the assets of the Texas Banking & Investment Co. to those entitled thereto - primarily the stockholders, but, after Kirby's acquisition of the stock, to him as assignee of the rights of the former stockholders. This distribution the trustees made. What*914 the acquisition of the rights of such assignee cost him was of no interest to the distribution trustees, but was of interest only to the assignee, Kirby, by way of proper basis to be set up with reference to the taxation of the liquidation distribution. We therefore hold that the total basis to petitioner, in the taxable years here in issue, as to the amounts received as liquidating dividends is the cost to Kirby of the assignment from Mrs. Willson, to wit, $383,025, which is the total of $100,000 down payment in cash and notes from Kirby to Mrs. Willson, and $211,275 later paid her by Kirby, pursuant to contract, from the dividends paid by the Gladys City Oil, Gas & Manufacturing Co., together with $71,750 paid to the other parties shown by the record to have been claiming interests in the Texas Banking & Investment Co. stock, for assignments from them. These amounts, of course, are to be divided, as affecting petitioner's interest. This liquidation distribution was received partly in 1928 ($400,000 received October 1, 1928) and the balance in 1929. We hold this to be taxable in 1928 to the extent that it exceeds the entire basis in the taxable years, which basis, as above seen, *915 is $383,025, and the balance to be taxable in 1929. Any further payments to Mrs. Willson from receipts in years later than the taxable years here involved from the oil and gas production designated by the contract between her and Kirby are so contingent upon the possibility of oil and gas production, and upon the length of life of Mrs. Willson, that we hold that they had no market value during the taxable years here involved, and were not shown to have such value. Therefore such future payments can not properly b e set up as a part of the basis for the taxable years herein involved.
We consider and hold that Kirby was not a mere trustee or agent for Mrs. Willson as to one-fourth of the total dividends paid by *602 the Gladys City Oil, Gas & Manufacturing Co., and did not receive any money for her benefit, and therefore hold that the amounts received*916 by him were income. The obligation to pay Mrs. Willson was personal. She did not retain any lien or interest in the dividends themselves, nor did she warrant the title to them. Kirby was owner of the dividends by assignment from her. She reserved no one-fourth interest therein. Moreover, the consideration to be paid by Kirby for Mrs. Willson's rights was not to be abated or reduced in consequence of any judgment obtained against the Texas Banking & Investment Co. The payments to her were merely a part of a purchase, enforceable as a personal obligation. Kirby was not a mere conduit for the passing of the dividends to Mrs. Willson. He was to pay her, not the dividends themselves, but "amounts equal to one-fourth (1/4) of the total dividends." The difference is important, and, considering the desire of Mrs. Willson that the payment not be abated or reduced in consequence of any judgment obtained, this difference between dividends and amounts equal to dividends appears to have been an intentional one. We find in these circumstances neither mere agency nor trusteeship.
We conclude and hold, therefore, that petitioner's gain should be computed on the basis of values as heretofore*917 herein determined, or stipulated, subject to the mutual concessions made by the parties in the stipulations, and subject also to the provision that the same gain on liquidation of the Texas Banking & Investment Co. should not be taxed twice, but only in the particular year in which actually received as shown by the findings of fact and stipulations, after allowing for proper basis as above indicated.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * *
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* * * ↩
2. (h) As used in this section and sections 201 and 204 -
(1) the term "reorganization" means * * * (C) a recapitalization, * * * ↩
3. (2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. ↩
4. SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it. ↩
5. SEC. 115. (c) Distributions in liquidation.↩ - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *