*2254 Evidence held insufficient to overcome respondent's determination of value.
*730 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies asserted by the respondent for the year 1920, as follows:
| I. Bertram Marston | $7,799.68 |
| Thomas M. James | 29,411.29 |
| William H. Jones | 4,785.80 |
| Lewis W. Foster | 351.21 |
Only so much of each deficiency is in controversy as arises from the action of the respondent in including in the taxable income of the petitioners for 1920, amounts alleged by him to represent the fair market value of certain shares of the capital stock of the Thomas M. James Co. received by the petitioners under the circumstances hereinafter set forth.
FINDINGS OF FACT.
The petitioners are the original stockholders of the Thomas M. James Co., a personal service corporation engaged in building architecture, which was organized July 7, 1920.
Thomas M. James, one of the petitioners herein, engaged*2255 in business as an architect in the year 1900, and continued and built up the business under his own name until July 7, 1920. Subsequent to the year 1900 he associated with himself in the business four other men, namely, I. Bertram Marston, William H. Jones, and Lewis W. Foster, petitioners herein, and Russell C. Spring. About July, 1915, James, Marston, Jones, Spring, and Foster made an oral profit-sharing agreement by which the profits of the business were to be and from that time were divided as follows:
| Per cent. | |
| Marston | 23 |
| Jones | 18 |
| Spring | 4 |
| Foster | 4 |
| James | 51 |
*731 The Thomas M. James Co. was incorporated with an authorized capital of $100,000, divided into 2,000 shares of the par value of $50 each, and on July 7, 1920, it acquired all of the assets of the business theretofore owned and conducted by Thomas M. James, and issued therefor its entire capital stock. James retained 1,020 shares, or 51 per cent of such stock, and the remainder was issued to Jones, Marston, Spring, and Foster, in consideration of the cancellation by them of the profit-sharing agreement theretofore made by and between them and James, and in the same proportion as their*2256 profit-sharing rights under said agreement, so that the capital stock of the corporation was owned and held as follows:
| Per cent. | |
| Marston | 23 |
| Jones | 18 |
| Spring | 4 |
| Foster | 4 |
| James | 51 |
The opening entries on the books of the Thomas M. James Co. were as follows:
| $10,000.00 | Cost. | |
| 8,896.95 | Accounts receivable. | |
| 4,407.16 | Thomas M. James. | |
| 106,683.53 | Accrued commissions on uncompleted work. | |
| 10,000.00 | Furniture and fixtures. | |
| 15,000.00 | Statistical data, specifications, plans, etc. | |
| William H. Jones | $7,450.65 | |
| I. B. Marston | 9,997.19 | |
| Vouchers payable | 5,856.28 | |
| Subscriptions | 99,850.00 | |
| Surplus | 31,833.53 | |
| 154,987.64 | 154,987.64 |
The profits of the business conducted by Thomas M. James as an individual, earned prior to July 7, 1920, had been entirely distributed in accordance with the profit-sharing agreement to the extent of the cash available. There not being sufficient cash to make a complete distribution of the earnings the individual accounts of William H. Jones and I. Bertram Marston were accordingly credited upon the books of the corporation in the opening entry with the respective amounts of $7,450.64 and $9,997.19, *2257 representing the remaining portion of the profit to which they were entitled. The debits in the *732 opening entries which corresponded with the credits made to the individual accounts of Jones and Marston were $8,896.95 accounts receivable representing uncollected bills rendered for services and $4,407.16 debit balance in the personal account of Thomas M. James, together with the amount of $10,000 cash which James paid in to the corporation at its inception. An item of $5,856.25 was entered on the liability side of the account as vouchers payable. The capital of the corporation, in the aggregate amount of $131,683.53, allocated between stock subscriptions of $99,850 and surplus of $31,832.53, was represented in the opening entry by the item of $106,683.53 listed as accrued commissions on uncompleted work, an item of $10,000 for furniture and fixtures and an item of $15,000 for statistical data. No inventory was taken of the furniture and fixtures or statistical data, the amounts of $10,000 and $15,000 being arbitrary amounts agreed upon by the stockholders to be placed upon the books of the corporation as representing value to be ascribed to these assets on the opening*2258 balance sheet. The item for accrued commissions on uncompleted work was an estimate of the gross income that would be received from the work then in progress and a considerable portion of that amount would necessarily be used up in the cost and expense of completing the work. The amount of such commissions actually billable on July 7, 1920, was $32,006.16.
The respondent, upon audit of the income-tax return filed by the petitioners for the year 1920, determined that the fair market value of the capital stock of Thomas M. James Co. received by them as above set forth was $60,51 per share; that Thomas M. James received his stock in the corporation in exchange for property that cost him nothing; that Marston, Jones, and Foster had received their shares of stock from the Thomas M. James Co. "for past services and in lieu of giving up certain rights to unrealized profits," and that the petitioners had realized gain in the amounts of $61,722.80, $27,835.71, $21,784.50, and $4,841.04, respectively.
OPINION.
MARQUETTE: For several years prior to 1920 petitioner James was engaged in business as a building architect and the other petitioners were employed by him on the profit-sharing*2259 basis. On July 7, 1920, the Thomas M. James Co., was organized and it immediately acquired the individual business of James and issued in exchange therefor all of its capital stock. James retained 51 per cent of the stock and the remainder was given to the four associates in the same proportion that they were entitled to the profits under their profitsharing agreement with James and in consideration thereof they *733 consented to a cancellation of the agreement. The question presented herein is whether the shares of stock so received by the petitioners constituted income to them and if so the amount thereof. The petitioners contend (1) that the transaction was an exchange of property and could not give rise to gain or loss within the meaning of the revenue act then in force, and (2) that even if the transaction be held to be one giving rise to gain or loss, they realized no income, for the reason that the stock of the Thomas M. James Co. had no fair market value.
The petitioner's first contention is without merit and may be disposed of summarily. Section 202(b) of the Revenue Act of 1918, which was in effect during the year 1920, provides that:
When property is exchanged*2260 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; * * *
It is clear from the statute quoted that if the stock received by the petitioners had a fair market value, it must be treated as to the equivalent of cash to the extent of that value and gain or loss computed on that basis.
The respondent has determined that the capital stock of the Thomas M. James Co. had a fair market value of $60.51 per share when it was received by the petitioners. The burden of proof is upon the petitioners to show that the respondent's determination is erroneous. They have failed to meet that burden, and we are unable to find from the evidence any ground for disturbing the valuation the respondent has ascribed to the stock in question.
Reviewed by the Board.
Judgment will be entered for the respondent.