*971 Petitioner owned stock of corporation A. with other stockholders of that company he organized a new corporation, each subscribing to its stock in amounts equal to their holdings of A stock, and paying for the same in cash. At the same time the new corporation purchased from petitioner and the other stockholders their A company stock, paying for the same in cash. Held, petitioner did not exchange old stock for new within the meaning of section 112(b)(5) of the Revenue Act of 1928, but made sale of one stock and purchase of another. Held, further, that petitioner sustained a deductible loss upon the sale of his A stock.
*222 In this proceeding the determination of a deficiency of $287.49 for the year 1929 is contested. Only one issue is raised, namely, whether petitioner sustained a deductible loss when he sold stock to a newly formed corporation for cash and at the same time purchased the same number of shares of the new corporation for approximately the same price received for the stock sold.
FINDINGS*972 OF FACT.
The facts were stipulated as follows:
James E. Wells, the petitioner, is a resident of the City of Buffalo, New York.
On October 16, 1929, the petitioner purchased 100 shares of the common capital stock of Marine Midland Corporation, a corporation organized under the laws of the State of Delaware, and engaged in the holding of the stocks of certain banks and trust companies in the State of New York. The petitioner paid therefor $60.00 a share, or a total purchase price of $6,000.00.
Thereafter and on December 27, 1929, petitioner subscribed for and acquired at a total cost of $3,212.50 in cash, or $32.12 1/2 a share, 100 shares of the common capital stock of Midland Equities, Inc., a New York corporation. One of the purposes for which said Midland Equities, Inc., was formed is stated in its certificate of incorporation as follows:
"To buy, sell, exchange, pledge and generally deal in and with government, municipal and industrial bonds and other securities, and in and with the stock, debentures, trust receipts and other securities of corporations, both domestic and foreign."
At the first meeting of the board of directors on December 27, 1929, the following*973 were duly elected directors of said Midland Equities, Inc., to serve until the next annual meeting of stockholders or until their successors should be elected and qualify:
| A. C. Livingston | Edward H. Letchworth |
| James E. Wells | Charles M. Kennedy. |
| George F. Phillips |
*223 At the same meeting on December 27, 1929:
"The President stated that this corporation had been organized for the purpose, among other things, of purchasing stock of Marine Midland Corporation (Delaware) at the present market as an investment and for the purpose of withholding the stock so purchased from the general market for the time being.
"He further stated that he had secured subscriptions for 11,300 shares of the capital stock of this company at $32.12 1/2 a share as follows:
| A. Clinton Livingston | 600 shares |
| James E. Wells | 100 shares |
| Gretchen Rand Penney | 1,250 shares |
| Evelyn Rand Sheets | 1,250 shares |
| Tomas A. Wilson | 1,000 shares |
| Grace M. Knox | 2,600 shares |
| Marjorie K. Campbell | 2,600 shares |
| Charles M. Kennedy | 600 shares |
| George F. Phillips | 300 shares |
| Fred J. Coe | 1,000 shares |
"On motion duly made and seconded the officers were authorized to issue stock*974 of this corporation to the foregoing persons and in the foregoing amounts to the aggregate amount of 11,300 shares upon receipt from them respectively of payment therefor in cash at $32.12 1/2 a share and were further authorized to release the subscribers named in the Certificate of Incorporation from their subscriptions to stock set forth therein."
Said stock was so issued.
Also at this meeting:
"On motion duly made and seconded the President was authorized and emplowered to purchase 11,300 shares of stock of Marine Midland Corporation at not more than $32.00 per share."
In accordance with this authorization the President, on December 27, 1929, purchased for the account of Midland Equities, Inc., at $32.00 per share, shares of Marine Midland Corporation stock in the amounts and from the persons following:
| A. Clinton Livingston | 600 shares |
| James E. Wells (the petitioner) | 100 shares |
| Gretchen Rand Penney | 1,250 shares |
| Evelyn Rand Sheets | 1,250 shares |
| Thomas A. Wilson | 1,000 shares |
| Grace M. Knox | 2,600 shares |
| Marjorie K. Campbell | 2,600 shares |
| Charles M. Kennedy | 600 shares |
| George F. Phillips | 300 shares |
| Fred J. Coe | 1,000 shares |
At all times material*975 herein A. Clinton Livingston and the petitioner, James E. Wells, were Vice-Presidents of The Marine Trust Company of Buffalo. Thomas A. Wilson was President of The Marine Midland Trust Company of Binghamton (N.Y.) and a director of Marine Midland Corporation. Fred J. Coe was President of the Power City Bank of Niagara Falls, New York. Said banks were member of the Marine Midland Group of banks, a controlling interest in the stock of which was owned by Marine Midland Corporation. George F. Phillips throughout the month of December was and now is Assistant Secretary of Marine Midland Corporation and thereafter became a director of said corporation. Gretchen Rand Penney and Evelyn Rand Sheets are *224 sisters of George F. Rand, President of Marine Midland Corporation. Grace M. Knox is the mother, and Marjorie K. Campbell the sister of Seymour H. Knox, a director and Vice-President of Marine Midland Corporation. Charles M. Kennedy was and is a large stockholder of said Marine Midland Corporation, and his father was for many years prior to his death a director of The Marine Trust Company of Buffalo.
On said December 27, 1929, the petitioner duly assigned, transferred and*976 delivered to Midland Equities, Inc., certificates for his 100 shares of the capital stock of Marine Midland Corporation. On December 28, 1929, petitioner received from Midland Equities, Inc., in payment of the purchase price thereof, the sum of $3,200.00.
Petitioner did not reacquire any of said stock or acquire any other stock or securities of Marine Midland Corporation within thirty days before or after the sale of his said 100 shares.
The fair market value of petitioner's Marine Midland Corporation stock at December 27, 1929, was $32.00 per share, the average price at which said stock was selling on the Buffalo and Boston Stock Exchanges on said date.
Thereafter on various dates between December 27, 1929 and November 19, 1930, Midland Equities, Inc., purchased through brokers in the open market 800 additional shares of the capital stock of the Marine Midland Corporation and sold through brokers 100 shares, leaving on hand November 19, 1930, 12,000 shares.
At the Board of Directors meeting held on November 19, 1930, the following resolution was passed: "Resolved, that the proper officers of this corporation be and they are hereby authorized, empowered and directed when*977 said certificate of dissolution shall have been filed, as aforesaid, to distribute the assets of the corporation then remaining, consisting of 12,000 shares of the capital stock of Marine Midland Corporation, pro rata to the stockholders of the corporation upon the surrender by them, respectively, to this corporation of their stock in this corporation for cancellation." The certificate of dissolution was issued on December 1, 1930.
The Marine Midland Corporation had an authorized capital stock of $100,000,000.00 par $10.00, and there was outstanding on December 27, 1929, 5,205,142 shares.
Petitioner kept his accounts and filed his returns on a cash receipts and disbursements basis.
On or about March 15, 1930, petitioner filed a return for Federal income tax purposes, of his income for the calendar year 1929. He deducted $2,800.00 from his gross income for the year 1929 as a loss on account of the sale of his said 100 shares of Marine Midland Corporation stock to Midland Equities, Inc., being the difference between the cost thereof, or $6,000.00. and the $3,200.00 he received from the sale thereof.
The Commissioner of Internal Revenue has finally determined that petitioner's*978 subscription for and acquisition of midland Equities, Inc., and the subsequent transfer of shares of Marine Midland Corporation stock to Midland Equities, Inc., for a cash consideration constituted a non-taxable exchange within the meaning of the provisions of section 112(b)(5) of the Revenue Act of 1928, and that the loss claimed by the petitioner should be disallowed.
OPINION.
GOODRICH: The fundamental controversy here is whether petitioner sold his stock in the Marine Midland Corporation or exchanged *225 it for stock in the Midland Equities, Inc. If he made a sale of it, as he contends he did, he may deduct from his income the loss claimed, no dispute being raised as to its amount. If he made an exchange of stocks, as respondent has determined he did, the loss claimed may not be recognized, for the transaction falls within the provisions of section 112(b)(5) of the Revenue Act of 1928, 1 as a transfer of property to a corporation solely in exchange for its stock. Consequently, we must determine upon the facts before us not what petitioner intended to do, not what he might have done, (see *979 ), but what he did. . In our opinion, the agreed statement of facts (and we have no other evidence) shows indisputably that there was no exchange of stocks, as that term is used in the statute, but that petitioner sold one stock and bought another. The very wording of the stipulation forestalls any other conclusion. It states that petitioner "subscribed for and acquired at a total cost of $3,212.50 in cash" his Midland Equities stock. That language stipulates a purchase by him. The terms describing the disposition of his Marine Midland stock are equally unambiguous. It was "purchased" by Midland Equities, Inc., and he received from that company "in payment of the purchase price thereof, the sum of $3,200.00." That language stipulates a purchase by the corporation and, necessarily, a sale by petitioner. See ; affd., , citing . These descriptions of the transactions are not recitals contained in corporate minutes, or other expressions*980 of professed intentions of the parties, nor do they serve to delineate merely the form of the transaction, through which we may look to substance to determine what actually occurred. They are facts submitted to us by the parties, and we find nothing in the agreed statement to indicate that they are untrue or that, for other reason, the stipulation should be rejected. We conclude therefore, that there was no exchange of stocks, but that petitioner did just what he claims he did, namely, sold one stock and purchased another. (petition for review dismissed, ); ; affd., ; ; affirming ; ; ; .
*981 *226 The arguments advanced by respondent upon brief urging us to a contrary conclusion tend mainly to suggest possible inferences casting doubt upon the bona fides of the sale. Of course, if the sale was not bona fide, petitioner would not be permitted to deduct the claimed loss from his income. ; ; ; . There is no evidence here that petitioner failed to part with his property definitely and without reservation, that he retained any control over it, or ownership in it, or that there was any prearrangement between him and the purchaser respecting its resale or recovery. True, petitioner became a stockholder in the corporation which purchased the stock from him, but he did not thereby retain the ownership and control of the stock which he had when it was in his hands for ownership of its assets by a corporation is not ownership by its stockholders. 1 Fletcher, Corporations 50; *982 ; ; . And even though the primary motive for his sale was to establish a loss, as respondent contends, that fact would not make the loss unallowable, ; ; ; and cases there cited.
The case of ; affd., , upon which respondent relies, is distinguishable from the case at bar. That case arose under the Revenue Act of 1921, and the decision was specifically rested on section 202(c)(3) of that act, which differs from the controlling provisions of the 1928 Act in that under the former it was necessary only that the property be transferred to the corporation, whereas the later act requires that the be transfered solely for stock or securities in such corporation, the requirements as to control of the corporation after the transfer being the same. *983 ; . See also "Notes on the Revenue Act of 1924," Magill, 24 Columbia Law Review, 836, 843; and discussion pertaining to section 203(b) of the Revenue Act of 1924 in Gregg Statement before the Senate Committee on Finance. Moreover, in the Labrot case, because of the wide divergence between the cost of the property and the price at which it was transferred to the corporation, the appellate court inferred that the sale was not bona fide.
Reviewed by the Board.
Judgment will be entered for the petitioner.
SEAWELL and ADAMS dissent.
Footnotes
1. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩