*4046 1. Year of sale determined for taxation purposes.
2. The determination of the Commissioner as to value of stock received in payment of debt, approved.
*672 This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1921, in the sum of $3,819.40. Two errors are assigned: (1) The inclusion in taxable income for the year 1921 of the entire profit derived from the sale of assets sold under a contract of sale dated December 31, 1920, and on the installment basis; (2) the inclusion in income for the year 1921 of 21, 580 shares of the corporate stock of the M.T.C. Oil & Gas Co. at its par value of $21,580.
FINDINGS OF FACT.
Petitioner is an individual with residence at Los Angeles, Calif., and in the year 1920 and prior thereto, was a member of a partnership known as "The State Line Gas Company." The partnership owned and operated gas lines, gas wells and compressor stations, and sold gas at wholesale at Coffeyville, Kans. Petitioner owned a one-fourth interest in*4047 the partnership. During the year 1920 members of the partnership were carrying on negotiations looking to the sale of the entire property and equipment. On December 31, 1920, the following contract of sale was entered into:
CONTRACT OF SALE
ARTICLES OF AGREEMENT, made and entered into this 31st day of December, 1920, by and between The State Line Gas Company, or Tulsa, Oklahoma, a partnership, composed of S. C. Clover, H. J. Culbertson, E. F. Huffman and George I. Bumbaugh, parties of the first part, and the Elbukan Oil Company of Eldorado, Kansas, a corporation, existing under the laws of the State of Delaware, and The M.T.C. Oil & Gas Company, of Waggoner, Oklahoma, a corporation, existing under the laws of the State of Delaware, party of the second part.
In consideration of the payments hereby reserved, and of the performance of the conditions and stipulations hereinafter contained, and on the part of the said party of the second part, to be performed, the said first party grants, sells and conveys unto said second party, its entire business interests, real and personal, a Schedule of which is hereto attached, marked "Exhibit A", and made a part hereof.
*673 *4048 Said second party, in consideration of such sale, hereby agrees to pay said first party, the sum of two Hundred Thousand ($200,000) Dollars, in the following manner:
1. Fifty Thousand ($50,000) Dollars cash to be placed in escrow in Producers State Bank, Tulsa, Oklahoma, pending the examination of the titles of the said estate of the said first party and the examination of the actuil physical property itself, by the said second party or its attorney. At the completion of such examination and the approval thereof on the part of second party, such party will tender the last named cash sum unto said first party. It is mutually agreed that the examination of the physican property will be completed within Five (5) days of this date, and that such examination of abstracts, assignments and other instruments of title and transfer shall not exceed Ten (10) days, dating from receipt thereof by said second party. The balance of the $150,000.00 is to be paid within ninety (90) days from the date hereof, in cash and gas as follows: $5,000.00 to be paid monthly, and all gas received from January 1, 1921 shall be retained by first party until final payment in cash shall have been made; the money*4049 which said first party shall have received as above described, shall be deducted from the said unpaid balance of the $150,000.00.
All assignments of title and evidences of transfer are to be placed in escrow in Producers State Bank, Tulsa, Oklahoma, by said first party and there to remain until final installment of payment is paid first party by second party, and then to be turned over to said second party. Copies of all such instruments of conveyance are to be mailed by said first party, to the attorney of second party, Fred Robertson, Federal Building, Kansas City, Kansas, together with all abstracts of title.
It is mutually agreed and understood by said parties hereto, that in the event of failure on the part of said second party to pay the balance of the entire purchase price as above set out, and in the manner and within the time hereinbefore specified, party of the first part will grant further necessary time for the performance of these conditions of payment, and in consideration of such extension of time of completing payments, second party hereby agrees to pay unto said first party, a penalty of 2% per month, payable monthly on any, and all unpaid balance, until all*4050 penalties and unpaid balance is paid in full, and until the said $200,000.00 shall be paid in full.
It is understood and agreed that final payment shall be made in full within six months from the date hereof.
It is mutually understood and agreed by said parties hereto, that first party hereto shall retain title to the property herein described until final payment shall have been made, but that said second parties shall operate and develop said property at its own expense, and shall assume all responsibility connected therewith, beginning as of date of January 1, 1921, and are to receive credit on purchase price for all benefits derived from said property, from sid date of January 1, 1921.
It is understood and mutually agreed by the parties hereto, that the properties purchased under this agreement shall be the sole and only security for any and all deferred payments hereunder.
The aforesaid stipulations are to apply to and be binding upon the heirs, executors, administrators and assigns of the respective parties hereto.
Pursuant to the contract of sale above set forth, the purchasers deposited in escrow in the Producers State Bank of Tulsa, Okla., a draft for $50,000*4051 and subsequent to December 31, 1920, each of the *674 partners, including petitioner, were paid out of the $50,000 so deposited, the sums to which they were entitled in accordance with their interest in the partnership.
After the debts of the partnership were paid from the cash received from the sale, each partner was left to the collection of the balance due under the contract of December 31, 1920. In one instance the entire balance due was collected in cash in the year 1921.
In November, 1921, petitioner had collected all sums due him under the contract of December 31, 1921, except $21,580. One or about that date the M.T.C. Oil & Gas Co. represented to petitioner that if it could secure an unincumbered title to the property of the State Line Gas Co., it would be in better position to sell its stock to the public. The company proposed to pay the unpaid portion of its debt evidenced by the contract of December 31, 1920, with its stock at its par value and that it would agree to sell such stock at par without charge for commissions incident to such sale, and also pay a penalty of 2 per cent per month until such stock was sold. The consideration for this proposal was*4052 that petitioner and his former partners should release the contract of December 31, 1920, from escrow and deliver it to the company. Petitioner accepted the proposition and the company delivered to him 21,580 shares of its stock. Thereupon, deed to the property was released from escrow and delivered to the company. The stock was delivered to petitioner. That M.T.C. Oil & Gas Co. never sold the stock. Petitioner collected the penalty of 2 per cent each month until March, 1922. The M.T.C. Oil & Gas Co. had various valuable properties other than the State Line Gas Co. properties. The properties on the books of the former company were appreciated over the cost to them of the properties to the extent of about $700,000. The M.T.C. Oil & Gas Co. endeavored to sell its stock by "high pressure salesmanship" and also paid very liberal commissions to salesmen for selling their stock, as well as ran "booster" trains from the East to the properties in Oklahoma, in an effort to sell stock in the company.
Petitioner reported his income on the cash receipts and disbursements basis. The State Gas Line Co., in filing a return for the year 1921, treated the sale to the M.T.C. Oil & Gas Co.*4053 as occurring in the year 1921.
OPINION.
MILLIKEN: Two questions are presented for consideration by the pleadings: First, Was there a sale of partnership property in the year 1920 so as to entitle petitioner to report the proportionate gain derived therefrom in that year, rather than being required to report the total gain as derived from a sale occurring in the year 1921? *675 and, second, What was the fair market value of the stock of the M.T.C. Oil & Gas Co. received by petitioner in November, 1921? The respondent has treated the sale as occurring in the year 1921, and has treated the stock, when received by petitioner, as having a fair market value equal to the par value thereof.
The provisions of the contract of sale clearly provide that the $50,000 cash was to be placed in escrow in the Producers State Bank of Tulsa, and to await examination of titles and physical properties. The cash thus deposited was not in fact distributed to petitioner, who was on the cash receipts and disbursements basis, until the year 1921, and under the terms of the contract, could not have been distributed until the conditions subsequent had been complied with.
One of the partners*4054 testified, upon direct examination, as follows:
Q. Now, was this $50,000 mentioned in the contract as the first payment and which you say was put up in the form of a draft in the producers State Bank, later paid to the partnership?
A. Yes.And upon cross-examination, testified as follows:
Q. Mr. Clover, I believe you testified that possession of this property was delivered on December 31, 1920, is that correct?
A. That is correct. Q. How was it delivered? A. By escrow agreement in the Producers State Bank. Q. What was delivered on December 31?A. The assignment, the leases - draft to us pending examination of title.
Petitioner testified, on direct examination, as follows:
Q. Now, this $50,000 they put in the bank under the contract, together with the title papers conveying the property on December 31, 1920 - was that afterwards paid over to the partnership, that $50,000?
A. Yes.It is clear that the sale, in so far as net income for taxation purposes is concerned, was a 1921 transaction. Petitioner was on the cash receipts and disbursements basis and received no proceeds from the sale until 1921. It is also of more than passing note that*4055 in the return filed by the partnership for the year 1921, the sale of the properties was reported as a transaction occurring in the year 1921.
It is earnestly contended by counsel for petitioner that the stock in the M.T.C. Oil & Gas Co., which petitioner received in November, 1921, in full and final payment, did not have a market value equal to the par value thereof but was worth only 30 or 40 cents on the dollar. Evidence was introduced relative to the manner in which the corporation had appreciated its assets over the cost thereof on its books of account, the extravagant manner in which it attempted to sell its stock by "high pressure advertising," and the large commissions paid to salesmen for selling their stock. No evidence *676 was introduced showing the sale of any of the stock of the corporation during the year 1921 for less than par. The corporation also owned various valuable properties other than the properties which they purchased from the partnership and we are uninformed as to the respective values of such other properties and for all we know such additional properties may have had a value which would eliminate an apparent appreciation over cost of the properties*4056 purchased from the partnership. Petitioner took the stock in payment of a debt due him, believing the stock to be worth par, and took it under a contract providing for its resale, and also received penalties until March, 1922, by reason of the failure of the corporation to act in pursuance of the understanding with him.
The mere fact that assets are appreciated over cost on the books of account of a given corporation, and that large sums of money were spent for promotion and advertising purposes, does not, in and of itself, prove that the par value of the stock received by petitioner should be discounted 60 or 70 per cent.
A pertinent fact in this connection is that at the time petitioner entered into the agreement to accept the stock, his debt was amply secured. The contract of sale had not been delivered. It was still in escrow. He was under no compulsion to make the agreement. The fact that under these circumstances petitioner accepted the stock at its par value, in payment of his debt, is more persuasive of its then market value than the judgment of witnesses whose testimony must, to some extent at least, be influenced by the fact that the company subsequently failed. *4057 Petitioner has not proven what value attached to the stock received by him in November, 1921, and in such circumstances we must approve the determination of the respondent.
Judgment will be entered for the respondent.