*2895 1. Commissioner's appraisal of value of corporation stock approved.
2. Where both cash and corporation bonds form the consideration paid for capital stock in another corporation, held, that such bonds, at their market value at time of sale, are properly included in the computation of taxable income to seller. John B. Atkins et al.,9 B.T.A. 140">9 B.T.A. 140.
*227 Respondent asserted deficiencies in the income tax of petitioner for the calendar year 1925 in the sum of $346.59, from which petitioner appeals, and in addition seeks a refund of the taxes paid by him for said year in the sum of $4,497.17, alleging error as follows:
1. That respondent erred in determining that petitioner derived a taxable gain from the sale of 1,653 shares of the capital stock of the Alberni-Pacific Lumber Co., a Canadian corporation, within the taxable year; and
2. That respondent erred in treating $61,987.50 in corporation bonds received by petitioner as part of the selling price of stock owned by him in another corporation as*2896 taxable gain under the provisions of section 203(d)(1) of the Revenue Act of 1926.
*228 FINDINGS OF FACT.
Petitioner is an individual residing at Duluth, Minn., and engaged in the banking and investment business at said city. On November 4, 1918, Elizabeth B. Williams, wife of petitioner, died, leaving an estate which included among its assets 825 shares of the capital stock of the Red Cliff Land & Lumber Co., Ltd., a corporation.
The Red Cliff Land & Lumber Co., Ltd., prior to April, 1918, was the owner of large timber land holdings in the Dominion of Canada, which constituted its only assets. On said date it sold all of its said holdings to the Alberni-Pacific Land & Lumber Co. in exchange for 24,000 shares of the capital stock of said latter company, and these shares of stock of the Alberni-Pacific Land & Lumber Co., at the time pertinent to this inquiry, constituted the only assets of the Red Cliff Land & Lumber Co. In addition to the timber properties from the Red Cliff Land & Lumber Co., the Alberni-Pacific Land & Lumber Co. acquired a logging plant for which it paid 6,000 shares of its capital stock, and these holdings and plant constituted the whole of the*2897 assets owned by the said Alberni-Pacific Co.
On November 4, 1918, no market existed for the capital stock of the Red Cliff Land & Lumber Co., or of the Alberni-Pacific Land & Lumber Co., and the probate court, in the administration of the estate of Elizabeth Williams, found that the value of the 827 shares of the stock of said Red Cliff Co. owned by said estate was the sum of $160,967.28, or $194.64 a share. This valuation was arrived at through appraisements made in accordance with the laws of the State of Minnesota for estate and inheritance-tax purposes, and was adopted by the administrators of this estate in making their return for the value of said stock for Federal estate-tax purposes and entered on form 706, used therein.
In the distribution of the estate of Elizabeth B. Williams, petitioner received, as a part of his portion of said estate, 275 and a fraction shares of the capital stock of said Red Cliff Land & Lumber Co., which stock he later surrendered to the liquidating committee of the said company and received in exchange, as his distributive portion of the assets of said company, 1,653 shares of the capital stock of the said Alberni-Pacific Land & Lumber Co. In*2898 1925 petitioner sold all of his stock in the said Alberni-Pacific Lumber Co. for the price of $131,413.50, $69,426 of which was paid in cash, and $61,987.50 of which was represented by bonds of the purchasing corporation, which had a market value of 90 per cent of their face value at said date. This purchasing corporation was known as the "new" Alberni-Pacific Lumber Co., Ltd., of 1925, and was organized for the *229 purpose of taking over the properties of the old company of the same name.
The timber properties which, except for the logging plant and equipment purchased in 1918 by the first Alberni-Pacific Co. in consideration for $6,000 par value of its capital stock, formed the basis of valuation for the stock of these several corporations, was acquired prior to 1913 by a Wisconsin corporation composed of the same interests, who continued to hold the same through successive reorganizations down to the time of the last sale in 1925. In 1911 the Red Cliff Land & Lumber Co., Ltd., in whose name the title to these properties stood at said time, entered into a contract of sale of all of these properties with certain interests reputed to be acting in behalf of the German Empire, *2899 known as the Alve Von Alvensteben, Ltd., a corporation organized under the laws of the Dominion of Canada, for an expressed consideration of $2,228,700, payable in installments over a period of five years. In 1914 after paying approximately $1,070,000 principal and interest, the purchaser defaulted in its contract and the property reverted to the Red Cliff Land & Lumber Co.
It is stipulated that the market value on November 4, 1918, shall govern in determining the cost to petitioner of the Red Cliff Land & Lumber Co. stock received from the estate of Elizabeth B. Williams.
OPINION.
LANSDON: There being no dispute as to the selling price of the stock received by petitioner in exchange for his stock in the Red Cliff Land & Lumber Co., Ltd., it remains only for us to determine the cost of said stock to him, as shown by its market value on November 4, 1918. The probate court of St. Louis County, Minnesota, found the value of this stock to be $194.64 per share for inheritance and estate tax purposes. This valuation was adopted by the respondent in determining the profit to petitioner from the sale, and this finding we are bound to approve, unless the presumption in favor of*2900 its correctness is overcome by convincing proof presented by the petitioner. .
The findings made by the probate court were in accordance with the laws of that State and based upon estimates upon the value of the assets of the Red. Cliff Co. These assets consisted of 24,000 shares of the Alberni-Pacific Land & Lumber Co., Ltd., out of a total issue of 30,000 shares of stock, or a four-fifths interest in said latter company. The state court made an exhaustive survey and appraisal of the assets of the Alberni-Pacific Land & Lumber Co., Ltd., and the petitioner in his testimony before this Board, in effect admits that, under conditions existing at said time, the valuation found by the *230 court was in harmoney with his own judgment. In this connection the petitioner, under cross-examination by respondent's counsel, admitted that he was present at the hearings of the probate court when the valuation of this stock was under consideration, and that he thought at the time that the valuation fixed by the probate court was about right. When asked for his reasons for this conclusion, he explained that at that time he felt rather pessimistic*2901 about things; that the Alberni-Pacific Lumber Co. was a new corporation which had only been in existence since April, 1918; that it was without operating capital; and the Arthur Gilbert, who had theretofore selected the lands of the Red Cliff Co. and had given these holdings his personal attention, was the president of the new company and that in the latter part of November, 1918, he had died, which circumstance "seriously affected the company." When further pressed for an expression of his opinion as to whether or not the valuation of $194 per share was not too high at said time, he replied by saying that he did not believe that any minority holding could have been sold, but that "It might be that the entire holding of the company might have been sold at that price at that time." After all, it is the value of these assets on November 4, 1918, under conditions existing at said time, and not at the date of sale in 1925, as seems to be the theory of petitioner, that must govern. .
A great deal of testimony was presented by petitioner of expert timber men who were familiar with values of properties similar to these, which compose the bulk*2902 of the assets of these corporations, but none of the witnesses had ever seen these properties or claimed to have any personal knowledge of their value. The petitioner sought to establish a value for the timber properties by introducing in evidence the contract of sale of them made in 1911 with the Von Alvensteben Co. for the expressed consideration of $2,228,700 and treating this fixed sum as their true market value in 1911. He then attempted to establish their value as of November, 1918, by testimony of expert witnesses to the effect that values of like properties, once established, rarely receded or diminished. The infirmity of this evidence, aside from its novelty and remoteness, is that it is based upon a false hypothesis, in assuming that the figure expressed in the Von Alvensteben contract is any evidence whatever as to the value of the properties at that time. The transaction provided for in that contract was an installment sale in which the purchase price was payable in amounts spread over a period of five years. In these circumstances the actual price received by the seller was not the sum total of the payments provided in the contract, but the cash paid, plus the *231 *2903 value of the contract itself at date of sale. ; .
On the whole, the evidence before the Board tends to support the findings of the probate court as being the nearest approach to a true valuation for said stock on November 4, 1918, that could be made under conditions existing at that time. The action of the respondent in respect of his determination of the value of this stock is approved.
Petitioner further contends that respondent erred in including in his determination of taxable gain to petitioner from the sale of his Red Cliff corporation stock the bonds received as part of the sales price, claiming that, inasmuch as this transaction was one that involved an exchange of corporatte stock for securities in another corporation, such securities are excluded from such consideration under section 203(d)(1) of the Revenue Act of 1926.
The section cited provides:
If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property*2904 permitted by such paragraph to be received without recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
From a careful study of the above section in connection with paragraphs (1), (2) and (4) of section 203, it is seen that it provides the one exception in this entire section that authorizes the inclusion of securities taken in such transactions as we have under consideration here in the computation of taxable gain.
Paragraphs (1), (2) and (4) deal exclusively in transactions where property other than money is involved, and exempt all such as fall within the classes therein described from gain or loss consideration. Other transactions, however, were considered, wherein the holder of corporation stock might partially liquidate his interests and take both cash and stock, or other corporate property in exchange therefor. Hence, the addition of paragraphs (d)(1), which takes such out of the exempted classes enumerated in paragraphs (1), (2) and (4) by providing that in such cases the gain to recipient, if*2905 any, shall be recognized, but in an amount not in excess of the sum of the money and the fair market value of the other property received. It is clear that in this determination the respondent followed the law. .
Judgment will be entered for the respondent.