*2323 The transfer by members of a syndicate of their undivided interest in certain oil leases to a corporation in exchange for shares of the capital stock of the corporation, resulted in taxable income under section 202(b) of the Revenue Act of 1918.
*797 The Commissioner determined deficiencies of $782.70 and $7.13 in the petitioner's income taxes for 1919 and 1920, respectively. The case has been submitted upon a stipulation of facts relating to only one issue, to wit: whether or not the taxpayer realized a taxable gain on his interest in a syndicate upon the exchange of certain oil leases for shares of stock in a corporation. The petitioner abandoned all other contentions. The facts are found as stipulated.
FINDINGS OF FACT.
The petitioner is a resident of Washington, Pa.
In 1919 the petitioner and a number of other individuals associated themselves together for the purpose of acquiring certain oil leases covering property in Ohio and referred to herein as the "Ohio leases," and the subsequent transfer thereof of said leases to a corporation*2324 to be formed as the operating company for said leases.
The petitioner contributed the sum of $1,200 in cash to said syndicate, with the understanding that each of the associates would receive therefor shares of the capital stock of said proposed corporation in the same proportion that their respective contributions to the syndicate bore to the total amount paid into the syndicate.
Pursuant to said plan the aforesaid "Ohio leases" were purchased by the syndicate for the sum of $4,444, sometime after January 1, 1919, but before April 19, 1919. The syndicate organized, or caused to be organized, the proposed corporation, to wit, the Emerald Petroleum Co., to which corporation, on May 17, 1919, the said Ohio leases were transferred in consideration of the issuance by the corporation to the members of said group of 2,392 shares of its capital stock. Petitioner under the aforesaid plan received 184 shares of the capital stock of the Emerald Petroleum Co. of the per value of $25 per share.
The Emerald Petroleum Co., after securing said Ohio leases by the issuance of its capital stock, had no assets other than the said *798 leases and cash paid in on other subscriptions to*2325 its stock. It was necessary that the corporation raise additional funds in order to provide sufficient cash with which to operate the said leases. The syndicate members agreed upon a plan of selling additional capital stock of the corporation, the members agreeing to pay $100 for five shares, which was considered as four shares of par and one share as a bonus. It was further agreed to sell said stock to friends of the syndicate members on the same basis. The cash sales to syndicate members were as follows:
| Date | Number of shares |
| April 29, 1919 | 25 |
| May 2, 1919 | 25 |
| May 9, 1919 | 25 |
| May 17, 1919 | 43 |
| May 19, 1919 | 263 |
| May 21, 1919 | 499 |
| May 22, 1919 | 402 |
| May 24, 1919 | 354 |
| May 27, 1929 | 386 |
| May 29, 1919 | 440 |
| May 31, 1919 | 676 |
| Total | 3,138 |
The cash sales made by the syndicate members to their friends were as follows:
| Date | Number of shares |
| May 2, 1919 | 35 |
| May 6, 1919 | 10 |
| May 13, 1919 | 120 |
| May 15, 1919 | 15 |
| May 16, 1919 | 15 |
| May 23, 1919 | 50 |
| Total | 245 |
All the sales made during the year 1919 were made prior to May 31, 1919. Up to that date the Emerald Petroleum Co. had no assets whatsoever other than the said Ohio leases and the cash*2326 received from the sale of its corporate stock. No outside sales were made except the 245 shares sold to friends of the syndicate members and the stock of the corporation was never listed on any exchange or offered for sale. The corporation did not commence operations until after all sales in 1919 were made. The only evidence that the stock of the corporation had a market value on May 17, 1919, the date on which it was acquired by the petitioner, consists of the said cash sales to syndicate members and their friends.
If the Board agrees with the petitioner's contention, the taxpayer herein received no profit whatever through the transfer of the Ohio leases in exchange for capital stock of the corporation. If the Board agrees with the contention of the Commissioner, the taxpayer received a profit of $2,480 on the transfer by the syndicate to the corporation of said Ohio leases, computed as follows:
| 184 shares of stock at $20 | $3,680 |
| Investment in syndicate | 1,200 |
| Profit | 2,480 |
*799 If the Board considers this transaction as a continuing one and in effect a purchase by the petitioner of shares of stock in the Emerald Petroleum Co. through the medium of*2327 the syndicate to which cash was advanced prior to the organization of the corporation, but in pursuance to the general plan of its formation, then the petitioner realized no profit. If, on the other hand, the Board agrees with the contention of the Commissioner that the purchase by the petitioner of an interest in the syndicate constituted a closed transaction from which profit was realized when an exchange of such interest for stock was effected and that said stock had a market value of $20 per share, the taxpayer realized a profit of $2,480.
OPINION.
MURDOCK: Pursuant to a general plan the petitioner contributed to the syndicate formed for the purpose of acquiring certain oil leases, which were later transferred to a corporation organized to operate under the leases. Shares of stock of the corporation were distributed to the members of the syndicate in proportion to their respective interests in the syndicate. The petitioner contends that this was a continuing transaction and in effect a purchase of shares of stock in the corporation.
So-called continuing transactions, involving separate and distinguishable steps in a general plan, have been considered by us in cases*2328 resulting from the merging or reorganizing of corporations. In the case of , we said:
It may be conceded that the purpose and plan of this transaction was a reorganization of the Old Company, but that fact is not determinative of the question here nor is it of any special significance. We are concerned only with whether or not the petitioner received * * * shares of * * * stock in the New Company, plus cash, in exchange for stock in the Old Company, within the meaning of the Act. And this question must be resolved upon what was actually done, and not the effect of what done (, nor upon what may have been the design and purpose of the parties to the transaction (. Neither is it material that the same result might have been obtained by some other method or plan of reorganization. In the case of , we said: "It seems to us to be fundamentally unsound to determine income tax liability by what might have taken place rather than what actually occurred. *2329 Even though the practical effect may be the same in either case, the resulting tax liability may be quite different. ."
Speaking generally, in determining what was actually done in any case, this Board will regard substance rather than form. However, material and essential facts will not be dismissed or out aside as mere matters of form simply because they are related to and are steps in a comprehensive plan or reorganization, or together constitute a method of the attainment of a single desired *800 result. . In the instant case each step employed to bring about the ultimate result was essential to the consummation of the transaction and it can not be said that each, or any one, was not substantial.
* * *
* * * The fact that these several transactions together comprised a single plan of reorganization does not render them any the less separate and distinct undertakings. The nature of each transaction is determinable from the facts relating to it, and is not changed because of its association with other transactions in a larger and more comprehensive plan.
*2330 The petitioner's contribution of $1,200 to the syndicate, by which he acquired a direct interest in the oil leases, was a distinct step in the general plan, and, even though in contemplation of the ultimate receipt of shares of stock in the operating company, constituted a closed transaction at least for tax purposes. ; ; Cf. ; affd., ; ; ; affd., 5th Cir., C.C.A., Oct. 21, 1929.
Later, the oil leases were exchanged for 2,393 shares of stock which were distributed to the members of the syndicate in proportion to their contributions; the petitioner received 184 shares of the stock. The case of , involved this same transaction. The evidence there presented as to the value of the stock was substantially the same as that now before us. In that case we said:
The respondent has determined that the fair market value of the shares of stock received*2331 was $20 per share and has computed a profit of $2,480 from the transaction. The basis for this computation is the sale by the syndicate to the syndicate members and their friends of shares of stock at the price indicated. We have no evidence that the petitioner could not readlly have sold his shares of stock at a price of $20 per share at the date of receipt. For lack of proof that the respondent erred in his determination that the fair market value of the shares was $20 per share at date of receipt, the determination of the respondent upon this point is approved.
Section 202(b) of the Revenue Act of 1918 provides that:
When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * * *
We accordingly hold that the purchase by the petitioner of an interest in the syndicate and the subsequent exchange of that interest for shares of stock in the corporation resulted in taxable gain as found by the respondent. *2332 ; V. ; ; ; ; ; *801 ; .
Reviewed by the Board.
Judgment will be entered for the respondent.