*1128 A corporation issued its shares for money and purchased securities for money without filing a list of securities which is required by the state of its creation where capital stock is issued for property other than money. Held, the acquisition of the securities was not in exchange for the corporation's shares and the corporation's basis for computing gain or loss on the sale of the securities is not the same as would be applicable to the transferor, but cost.
*884 The Commissioner determined deficiencies in petitioner's income tax of $197.40 for 1935 and $1,702.61 for 1936. He computed the gain from sales of securities upon the basis of the purchase price paid by petitioner. Petitioner contends that in fact it acquired the securities in a nontaxable exchange for its own shares, and is entitled to the basis of the predecessor owner. Most of the facts were stipulated substantially as follows:
FINDINGS OF FACT.
1. The petitioner filed income tax returns for the taxable years 1935 and 1936 on the cash disbursements basis.
2. The petitioner*1129 was incorporated on May 9, 1935, under the laws of Maryland with an authorized capital stock of 5,000 shares of preferred stock having a par value of $100 per share, and 1,000 shares of common stock having no par value.
3. On May 15, 1935, occurred the first meeting of the incorporators and subscribers to the capital stock of petitioner. At that meeting the bylaws of the corporation were adopted, paragraph 5, article I of which provided, among other things, that each stockholder should have one vote for each share of stock, preferred or common. On May 15, 1935, the board of directors held its first meeting, at which, among other things, it authorized the issuance of 4,500 shares of preferred stock to be sold $100at per share and 25 shares of common stock to be sold at $1 per share, authorized the acceptance of subscriptions therefor in the amounts and by the persons set forth in paragraph 6 herein, and directed the issuance of said shares of stock upon payment of the specified purchase price.
4. At the same meeting of the board on May 15, 1935, the secretary reported that Louis W. Gunby had offered to sell to the corporation *885 certain securities, enumerated in a*1130 statement then presented, for the sum of $470,827.86, provided the corporation would assume payment of his personal note of $30,000 due to the First National Bank of Baltimore. The board thereupon authorized and directed the purchase of the securities and the assumption of payment of the note and directed that payment for said securities be made to Gunby upon proper transfer and delivery thereof to the corporation.
5. Also at the first meeting of the board of directors a resolution was adopted as follows:
RESOLVED, That Louis W. Gunby, President of the corporation, be and he is hereby authorized, empowered and directed, from time to time, to purchase and/or to sell and transfer for and on behalf of the corporation such securities as, in the exercise of his sound discretion, he may deem it wise or expedient for the corporation to purchase and/or to sell.
6. On July 3, 1935, when the stock certificates were ready for delivery, the capital stock of the corporation was issued to the original subscribers as follows:
| Preferred stock | Common stock | |||||
| Date | Certificate No. | Name | Shares | Amount | Shares | Amount |
| 5-15-35 | 1 | Louis W. Gunby (father) | 3,850 | $385,000 | ||
| 5-15-35 | 2 | Louis W. Gunby (father) | 650 | 65,000 | ||
| 5-15-35 | 1 | Graham Gunby (son) | 5 | $5 | ||
| 5-15-35 | 2 | Alice Gunby Fooks (daughter) | 5 | 5 | ||
| 5-15-35 | 3 | Louise Gunby Pilchard (daughter) | 5 | 5 | ||
| 5-15-35 | 4 | John K. Gunby (son) | 5 | 5 | ||
| 5-15-35 | 5 | Joseph Y. Gunby (son) | 5 | 5 | ||
| Total | 4,500 | 450,000 | 25 | 25 |
*1131 7. On July 3, 1935, Louis W. Gunby executed his check dated May 15, 1935, on the Salisbury National Bank to the order of the petitioner, in the amount of $450,000 in payment for the 4,500 shares of preferred stock of the corporation. On July 3, 1935, certificate No. 1 for 3,850 shares of preferred stock and certificate No. 2 for 650 more shares of preferred, or a total of 4,500 shares of preferred stock, dated May 15, 1935, in the name of Louis W. Gunby, were executed and delivered for and on behalf of the corporation.
8. On July 3, 1935, the corporation executed its check dated May 15, 1935, drawn on the Salisbury National Bank to the order of Louis W. Gunby in the amount of $440,827.86. On July 3, 1935, Louis W. Gunby delivered the securities referred to in paragraph 4 hereof, having a net fair market value of $440,827.86, and received the corporation's check dated May 15, 1935, referred to in this paragraph.
9. On July 3, 1935, after the said two checks of $450,000 and $440,827.86, respectively, had been delivered, Mary S. Lowe, as private secretary to Louis W. Gunby and as secretary and bookkeeper of *886 petitioner, took both checks to the Salisbury National*1132 Bank and deposited them to the accounts of the respective payees. The balance of Louis W. Gunby's account in that institution immediately prior to the entries occasioned by these two checks was $17,000.10 and the balance immediately subsequent thereto was $7,827.96. The balance in the account of petitioner in that bank immediately prior to the entries occasioned by these two checks was $3,861.08 and the balance immediately thereafter was $13,033.22.
10. Immediately after the certificates were issued to Gunby, he gave to his five children 650 shares of the preferred stock of the corporation by surrendering certificate No. 2 to be transferred to them, and the transfer was made of 130 shares to each child, all of these certificates being dated May 15, 1935.
11. A schedule of the securities turned over to the corporation by Gunby which were sold during the calendar years 1935 and 1936 by the corporation, together with their individual values as of pertinent dates, is in evidence.
12. Section 43 of article 23 of the Maryland Code Annotated requires that where capital stock is issued for property other than money, the board of directors must list the securities (a "stock issuance*1133 statement") together with an appraisal and description thereof and file the same with the sate tax commission. Upon receiving the list, the commission, under law, submits a copy thereof for filing in the clerk's office of the Superior Court in the county in which the corporation is domiciled. The use of checks was employed in the foregoing transactions to obviate the necessity of having the corporation submit to the Tax Commission of Maryland the aforesaid "stock issuance statement." The corporation did not comply with the statutory requirement of an exchange. The transaction was in the form of a sale and purported to be a sale.
13. The deficiency in this case is the result of the Commissioner using the value of the securities as of May 15, 1935 (as in the case of a sale) as a cost basis rather than their cost to Gunby (as in the case of a nontaxable exchange).
14. For the purpose of this case the value of the securities turned over to the corporation by Gunby was the same on July 3, 1935, as on May 15, 1935.
Louis W. Gunby is 86 years old. He is president, treasurer, a director, and stockholder of the petitioner. The petitioner was formed so that he might handle his*1134 estate while he was living and give his children the benefit of his experience and judgment in handling the interests that he gave them, and also to equalize his gifts among his children.
*887 The petitioner did not file with the Maryland Tax Commission the list of securities, their market value, and their description as required by the Maryland Code when capital stock is issued for property other than money.
OPINION. ,
STERNHAGEN: Petitioner's position is that, notwithstanding its deliberate purchase of Gunby's securities for money and its intentional omission to issue its own shares for them, its acquisition of the securities must be regarded as in exchange for its shares. Thus, by reason of sections 113(a)(8) and 112(b)(5) of the Revenue Act of 1934, the gain or loss from the sale of the securities would be computed upon the same basis as would be applicable to Gunby, the transferor, had he sold the securities. Gunby's basis would be his actual cost and, consistently with the Commissioner's present determination, it may be assumed that in computing the gain or loss to him from the sale of his securities to petitioner such basis was used. It should not be used again*1135 to determine the gain or loss of a succeeding owner, especially his own corporation.
There is always a difficulty in knowing when a corporation is to be recognized as a separate taxable person and when it is to be regarded as a mere formality. Cases can be found pointing each way, and always the circumstances deprive the holding of universal significance. There is no absolute. However, the general rule is that the corporation is recognized, and that its treatment as a mere form is exceptional. ; .
Petitioner does not ask that the legal character of the corporation as a person be disregarded, but that the legal character of its transaction be disregarded. The form of a sale was, it says, merely "employed to obviate the necessity of submitting" to the Maryland Tax Commission the list of securities received for shares issued. By reason, therefore, of the petitioner's willful conduct the state authorities have recognized its original stock issue as being for money. Is the Board, a Federal tribunal, to hold that this is not so and thus in an unrelated Federal*1136 proceeding intimate either that the petitioner has flouted the law of its creation or that the state has winked at the petitioner's failure to comply with it? The evidence shows that petitioner in fact issued its shares for money and therefore that no list of securities was filed with the state tax commission. We can not permit the evidence to be warped into a finding that in reality the shares were issued in exchange for securities. ; affd., .
The Commissioner correctly held that the petitioner acquired the *888 securities by purchase and that its gain or loss upon sale in the tax years was properly to be computed on the basis of the cost. The figures in the computation are not in dispute.
Reviewed by the Board.
Decision will be entered for the respondent.
MURDOCK, dissenting: I think the substance of this transaction was an exchange within the meaning of section 112(b)(5) of the Revenue Act of 1934. Cf. Gulf Oil Corporation v. Lewellyn,248 U.S. 71">248 U.S. 71; United States v. Mellon,281 Fed. 645. Gunby desired*1137 to transfer his securities to the corporation and to receive its stock. He tried to give the transaction the semblance of a sale so that it might appear to comply with a law of Maryland. He gave his check for $450,000 to the corporation as if he was subscribing for the preferred stock. But, as a matter of fact, he had only $17,000.10 in the bank at that time. Then the corporation gave Gunby its check for $440,827.86, as if it were buying the securities from him. But it had to see that both checks were deposited at the same time because it had only $3,861.08 in the bank. Those transactions were disingenuous and did not make a sale out of what otherwise would have been an exchange. The State of Maryland is the one to complain if any fraud was practiced in avoiding its laws. Our function is to decide whether upon this state of facts there was an exchange within the meaning of section 112(b)(5). If the Commissioner were contending in this case that the transaction was an exchange, and not a sale, I believe the form would be disregarded and the substance adopted. The prevailing opinion seems to put undue emphasis upon the fact that the petitioner seeks the benefit of an exchange. *1138 Our decision should be the same, no matter which party is to benefit.
SMITH, LEECH, DISNEY, and KERN agree with this dissent.