*2025 1. The fair market value of shares of stock at the date of the death of the decedent determined.
2. Where a taxpayer in 1923 sold shares of stock for cash and bonds of another corporation, and the bonds have no readily realizable market value, the gain realized from the transaction is the excess of the cash received over the basis prescribed by the statute for computing gain or loss.
*1070 This proceeding is for the redetermination of a deficiency in income tax of the estate of D. M. James for 1923 in the amount of $1,743.96. The issue presented is the amount of gain realized by and taxable to the estate of D. M. James in 1923 upon an exchange within that year of stock in the American Plate Glass Company for cash and bonds of another corporation. In his answer the Commissioner affirmatively alleges that the correct amount of the deficiency is $3,798.68 instead of the amount shown in the deficiency notice of $1,743.96.
FINDINGS OF FACT.
D. M. James died testate January 8, 1920, a resident of Newton, Mass. The*2026 executrix declined to serve and the petitioners were appointed administrators c.t.a., on February 15, 1920.
The deceased had very little property - less than $1,500 in real estate and less than $500 personal property, exclusive of certain shares of stock described hereafter.
The petitioners found among the assets of the decedent's estate one share of the capital stock of the American Plate Glass Company, which was appraised by appraisers appointed by the Commonwealth of Massachusetts on April 20, 1920, at either $40 or $60. The petitioners later discovered that certificate No. 360 for 55 shares of stock of the same company had been issued in the name of the decedent and was held by the Kane Bank & Trust Company, of Kane, Pa., under the following agreement:
October 1, 1909.
Kane Bank & Trust Company,
Kane, Pa.
Gentlemen:
Pursuant to agreement made the 22nd day of September, 1909, by and between Kane & Elk Railroad Company; James Manufacturing Company; *1071 James Brothers Lumber Company; James City Gas Company and the American Plate Glass Company, we herewith deliver to you in trust American Plate Glass Company's stock certificate No. 360 issued to D. M. James*2027 for 55 shares; Certificate No. 361 issued to H. J. James for 132 shares and Certificate No. 363 issued to William James Sons' Co. for 55 shares.
The agreement referred to cites that the American Plate Glass Company "shall, unless said several sums shall be paid to it by the said parties owing the same, respectively, prior to October 1, 1909, pay itself the full amount of its claim against said debtors as aforesaid out of the moneys retained in its hands as aforesaid and shall thereupon issue to said debtors, respectively, whatever shares of the capital stock of the American Plate Glass Company shall thereupon be due said debtors upon the payment of the above mentioned sums, respectively, which represent unpaid assessments, on the condition that said debtors will assign all of said stock to the Kane Bank & Trust Company, to be held by said Bank in trust until such time as said debtors, respectively, shall pay to the respective corporations out of whose moneys the sum shall have been advanced, the full amount retained by said American Plate Glass Company, when said stock shall be delivered by said Kane Bank & Trust Company, trustee, to the parties, respectively, in whose name it stands" *2028 upon order of the Presidents of the respective James Corporations referred to and the President of the American Plate Glass Company.
(Signed) AMERICAN PLATE GLASS COMPANY,
A. H. GAFFNEY,President.
J. T. RILEY,Secretary & Ass't. Treasurer.
Received and accepted this First day of October, 1909.
KANE BANK & TRUST COMPANY
Per (Signed) S. K. FOOTE, Jr.,
Treas.
The American Plate Glass Company was originally organized under the laws of New Jersey by the decedent and his brothers in 1905, with its principal office at Kane, and a plant at James City, Pa., for the manufacture of plate glass. The James brothers were the chief stockholders and officers of the company until amount 1910, when the control of the company passed to new interests who could finance it. The minority stockholders never received any dividends or financial statement from the company prior to the date of the death of the decedent. At about that time a brother of the decedent, with others, organized a stockholders' protective committee for the purpose of determining the status of the company. In the spring of 1920, the company issued its first balance sheet as of January 1, 1920, and*2029 paid a cash dividend of 6 per cent. The business of the company was especially prosperous in 1920 and subsequent thereto and the directors in 1922 entered into negotiations for the sale of the company to New York interests. At the date of the death of the decedent the company had outstanding 5,349 shares of capital stock. On December 22, 1922, the company declared a 300 per cent stock *1072 dividend. The petitioners received 168 shares from the stock dividend payable upon the shares of stock standing in the name of D. M. James. They were then in actual possession of 169 shares and controlled 55 shares additional held by the Kane Bank & Trust Company.
In 1923 the stockholders of the American Plate Glass Company, acting through a committee, agreed to sell their stock to the Joseph P. Day Industrial Dept., Inc., upon terms and conditions not material hereto. In accordance with the agreement the stockholders disposed of their shares of stock and received therefor cash and 6 per cent sinking fund gold bonds of the American Plate Glass Corporation, which was organized under the laws of Delaware to conduct the business that had theretofore been conducted by the American Plate*2030 Glass Company. For their shares of stock the petitioners received $23,344.61 cash and $20,500 par value of six per cent bonds of the American Plate Glass Corporation. Of the amounts received the petitioners, pursuant to an agreement made with the Kane Bank & Trust Company, turned over to that company $6,061.15 cash and $5,000 par value of the bonds which were to be held by that company pursuant to the agreement of October 1, 1909, above set forth. In 1928, the petitioners paid the balance due on the shares deposited with the Kane Bank & Trust Company in 1909, and received the proceeds from the sale of those shares.
There were few transactions in the shares of stock of the American Plate Glass Company near the date of the death of the decedent. The stock was closely held. The president of the corporation in 1922, prior to the declaration of a stock dividend, bought 146 2/3 shares of stock for $7,333.34, or at an average price of approximately $50 per share.
In determining the amount of the deficiency set forth in the deficiency notice the Commissioner computed a gain of $36,194.61 - the difference between a cost basis of $5,600 for the original shares and $41,794.61 (the*2031 sum of cash in the amount of $23,344.61 and bonds valued at $18,450), but restricted the taxable net gain to the amount of cash received, or $23,344.61, "in accordance with section 202(e) of the Revenue Act of 1921, as amended by the Act of March 4, 1923."
The Commissioner in his answer submits a recomputation of the deficiency based upon a taxable net gain of $36,194.61.
OPINION.
SMITH: The petitioners, as administrators of the estate of D. M. James in 1923, received $23,344.61 cash and $20,500 par value of the bonds of the American Plate Glass Corporation in exchange for 224 *1073 shares of the stock of the American Plate Glass Company, of which 56 shares were acquired by the decedent upon the organization of the corporation prior to 1910, and 168 shares by the petitioners as a stock dividend in 1922 or 1923. The respondent has determined the deficiency here in question upon the basis of the cost of the stock to the decedent, namely, $5,600. The deficiency notice upon which this proceeding is brought provides in part:
* * * Since the stock held by the Estate originally cost $5,600.00, a net gain of $36,194.61 is disclosed. However, in accordance with Section 202(e) *2032 of the Revenue Act of 1921, as amended by the Act of March 4, 1923, as embodied in Treasury Decision 3468, * * * the net gain is limited to the total cash received or $23,344.61.
For the purpose of this computation the respondent valued the bonds of a par value of $20,500 at $18,450.
Petitioners correctly contend that the value of the stock at the date of decedent's death is the basis for the determination of the taxable gain upon the sale of the stock in 1923. Elizabeth J. Bray, Administratrix,4 B.T.A. 42">4 B.T.A. 42; Dorothy Payne Whitney Straight, Executrix,7 B.T.A. 177">7 B.T.A. 177; Charles G. Barnes et al., Executors,8 B.T.A. 360">8 B.T.A. 360; Walter R. McCarthy, Executor,9 B.T.A. 525">9 B.T.A. 525; George B. Markle, Jr., III, et al.,10 B.T.A. 763">10 B.T.A. 763; Gustave E. Anderson, Trustee,10 B.T.A. 1376">10 B.T.A. 1376; Elizabeth Guthrie Heywood et al., Executors,11 B.T.A. 29">11 B.T.A. 29; William K. Vanderbilt et al., Executors,11 B.T.A. 291">11 B.T.A. 291; Jennie L. Miller, Executrix,11 B.T.A. 854">11 B.T.A. 854; *2033 Frank H. Clark, Executor,12 B.T.A. 425">12 B.T.A. 425; Blanche O'Brien et al., Executors,12 B.T.A. 1195">12 B.T.A. 1195; Russel Wolfe, Executor,15 B.T.A. 835">15 B.T.A. 835; Central Trust Co., Executor,19 B.T.A. 867">19 B.T.A. 867; Bankers' Trust Co. v. Bowers, 23 Fed.(2d) 941; Eldredge v. United States, 31 Fed.(2d) 924.
At the hearing and in his brief counsel for the respondent did not question but that the basis should be the fair market value of the stock at the date of the death of decedent, but he contends that the evidence does not warrant a finding that the value of those shares was in excess of $5,600.
The American Plate Glass Company was a close corporation that had been organized by members of decedent's family, who later lost control of the company. At the date of decedent's death the stockholders knew very little about the financial condition of the company, and it was some months thereafter before any such information was made available as a result of the work of a stockholders' protective committee. There were no known sales of this stock at or near the basic date (January 8, 1920). The one share of stock that*2034 the petitioners found among the assets of the estate was valued by appraisers appointed by the Massachusetts authorities at either $40 or $60. As late as 1922, before the declaration of a stock dividend, the president *1074 of the American Plate Glass Company acquired 146 2/3 shares for $7,333.34. The cost was approximately $50 per share. The petitioners have sought to establish a value of approximately $700 per share for this stock by testimony regarding the earnings of the company and an appraisal of its assets. The books of the company were not produced and the person testifying as to earnings was not connected with the company during the years for which he gave figures, which he said were arrived at "in auditing the books of the company and more clearly reflect the net income for those years than would the books at that time." The figures presented by him show the following earnings:
| 1917 | $122,780.76 |
| 1918 | 60,698.24 |
| 1919 | 380,150.80 |
| 1920 | 1,050,256.91 |
| 1921 | 347,691.27 |
We do not know what the earnings were prior to 1917, nor do we know the amount of capital invested in the plant at that time. The facts are that no dividend had ever been paid upon*2035 the stock prior to the date of the death of the decedent and the stockholders had never received from the corporation a financial statement showing the results of operation. Earnings may reflect the value of stock in some instances, but in others earnings are poor criteria of value. Cf. Fidelity Title & Trust Co. et al., Executors,10 B.T.A. 482">10 B.T.A. 482; Homer S. Johnson et al., Executors,11 B.T.A. 534">11 B.T.A. 534; Warren A. Cartier,11 B.T.A. 900">11 B.T.A. 900; affd., 37 Fed.(2d) 894. The evidence regarding the appraisal is not complete. The appraisal was made nearly a year after the basic date with which we are concerned. The appraisers did not testify and we know nothing of the method used or the basis of their appraisal. A certificate of the appraisal was submitted but this shows only the total appraised value of the physical assets. The record does not disclose other assets of the company, such as accounts receivable, money, etc., or the extent of the company's liabilities, from which we could ascertain its net worth, if any. Cf. *2036 Lee Sturgess, Administrator,2 B.T.A. 69">2 B.T.A. 69; Montgomery Bros. & Co.,5 B.T.A. 258">5 B.T.A. 258; Red Wing Linseed Co.,5 B.T.A. 390">5 B.T.A. 390; affd., 29 Fed.(2d) 253; certiorari denied, 279 U.S. 860">279 U.S. 860; Georgia Manufacturing Co.,5 B.T.A. 893">5 B.T.A. 893; Jerecki Manufacturing Co.,12 B.T.A. 1165">12 B.T.A. 1165; Anna S. Richards,13 B.T.A. 1279">13 B.T.A. 1279.
As above indicated, the respondent has determined the fair market value of the stock at the date of the death of the decedent at $100 per share, making a total value for all the shares sold in 1923, $5,600. The burden of proving a higher value for the shares is on the petitioners. Avery v. Commissioner, 22 Fed.(2d) 6. The determination *1075 of the respondent that the value of the shares of stock at the basic date was $5,600 is sustained.
In his answer to the petition filed in this case the respondent affirmatively alleges that the amount of the deficiency due from the petitioners herein upon the sale of the American Plate Glass Company stock in 1923 was understated in the deficiency letter of January 27, 1928:
* * * that the cost basis*2037 of the stock sold was $5,600.00, that cash and bonds in the amount of $41,794.61 was received therefor, and that a net gain of $36,194.61 was realized on said sale, as set forth in the deficiency letter; * * * that the correct deficiency due from the petitioners herein for the calendar year 1923 is $3,798.68. * * *
Section 202(e) of the Revenue Act of 1921 was amended to take effect January 1, 1923, by an act approved March 4, 1923. As amended, the provision reads:
(e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, *2038 the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.
The respondent offered no evidence to prove that the bonds of the American Plate Glass Company had a readily realizable market value. The petitioners offered evidence to the effect that they had tried to sell the bonds, but were advised by persons living in Kane, Pa., that there was no market for the bonds. The petitioners succeeded in selling one bond at a price of $84. We are of the opinion that the respondent has failed to prove that the bonds had a readily realizable market value within the meaning of that phrase as used in the statute. Although the bonds appear to have been amply secured, there was no market for them. The contention of the respondent for an increase in the deficiency is denied.
The deficiency notice upon which this proceeding is brought provides in part:
Since the examining officer included in your income from this source [the sale in 1923 of 224 shares of American Plate Glass*2039 Co. stock] $5,102.11, your income has been increased by $18,242.50. The statements made in your protest, as above referred to, are entirely insufficient to warrant any further change than indicated above.
*1076 It is seen from the above quoted paragraph that the respondent holds that the entire amount of the cash received upon the sale of the stock in question in 1923 constituted taxable income. This was manifestly in error, since upon the respondent's own theory of computation and under the statute only the amount of cash received in excess of the basis used for computing gain constitutes taxable income. The taxable profit on the sale was not in excess of $17,744.61.
Judgment will be entered under Rule 50.