*804 1. Petitioners' father took out life insurance policies on his own life and at his request the companies inserted provisions therein to the effect that upon his death the proceeds thereof would be payable to the beneficiaries, the petitioners herein, in installments, without right of commutation. Held, installments received by petitioners by reason of the death of the insured are excluded from gross income under section 22(b)(1) of the Revenue Act of 1934.
2. In 1929 and 1930 petitioners Thatcher and Huntzinger exchanged shares of stock in the Washington Railway Co. for shares of stock in the North American Co., pursuant to an offer made by the latter company. They treated the transactions on their books and in their income tax returns for those years as nontaxable exchanges. Respondent had knowledge of the transactions and, after examining their books and records, made no adjustment with respect thereto. Held:
(a) Under the facts shown, the transactions were not tax free exchanges and the proper basis of the North American stock in the hands of petitioners was its fair market value at the date of acquisition.
(b) Petitioners are not estopped to use the proper*805 basis for such stock in computing gain or loss upon the sale thereof in the taxable years 1935 and 1936.
(c) The basic date for valuing the new stock is the date petitioners were entitled to receive it and not the date the stock certificates were delivered to them.
3. In 1936 all the assets of A Co. were transferred to B Co., a new corporation, pursuant to a plan of reorganization under the Federal Bankruptcy Act. The stock in the new corporation was issued to the stockholders and bondholders of the old corporation, the stockholders of the old corporation receiving less than 80 percent of the stock in the new corporation. Petitioners Thatcher and Huntzinger, pursuant to the plan, surrendered certain shares of common and preferred stock in the old company and received in exchange therefor common stock and warrants to purchase common stock in the new corporation. Held, the transaction did not constitute a nontaxable reorganization, Helvering v. Southwest Consolidated Corporation,315 U.S. 194">315 U.S. 194, and petitioners are entitled to deduct the losses sustained.
*870 The respondent determined deficiencies in income tax as follows:
| Petitioner | Docket No. | Year | Deficiency |
| 1935 | $7,353.54 | ||
| Mahlon D. Thatcher | 101598 | 1936 | 13,121.43 |
| 1935 | 57.14 | ||
| Ada T. Huntzinger | 101599 | 1936 | 4,547.68 |
| 1937 | 2,377.28 | ||
| 1936 | 879.09 | ||
| Lydia T. Wheeler | 103219 | 1937 | 1,121.24 |
| Do | 103220 | 1938 | 1,637.97 |
The issues presented are (1) whether certain installment payments received by petitioners under life insurance policies taken out by their father on his own life are exempt from income tax under section 22(b)(1) of the Revenue Act of 1934; (2) whether transactions occurring in 1929 and 1930, whereby petitioners Thatcher and Huntzinger exchanged their stock in the Washington Railway & Electric Co. for stock in the North American Co., constituted taxable transactions with the result that the basis of the North American stock in the hands of petitioners was its fair market value on the date of acquisition, and, if so, whether the petitioners, under the facts shown, are estopped to use such basis in determining gain or loss upon the sale thereof*807 in the taxable years 1935 and 1936; and (3) whether *871 there should be recognized for purposes of taxation certain losses sustained by petitioners Thatcher and Huntzinger in exchanges of securities made by them in 1936 in connection with a reorganization under the Federal Bankruptcy Act of the American-La France & Foamite Corporation.
FINDINGS OF FACT.
Petitioner Mahlon D. Thatcher, an individual residing in Pueblo, Colorado, filed his income tax returns for the years 1935 and 1936 with the collector of internal revenue for the district of Colorado.
Petitioner Ada T. Huntzinger, an individual residing in San Marino, California, filed her income tax returns for the years 1935 to 1937, inclusive, with the collector of internal revenue for the district of Colorado.
Petitioner Lydia T. Wheeler, an individual residing in Chicago, Illinois, filed her income tax returns for the year 1936 to 1938, inclusive, with the collector of internal revenue for the first district of Illinois.
During his lifetime the petitioners' father, Mahlon D. Thatcher, Sr., took out seven life insurance policies, naming as beneficiaries thereunder his four children or their issue. The insured*808 died on February 22, 1916, on which date all of the contracts were in full force and effect and his four children, three of whom are petitioners herein, were living and are still living.
The record includes a written stipulation of facts with certain exhibits attached thereto, including photostatic copies of the seven insurance contracts, which we adopt as a part of our findings of fact. The seven insurance contracts are summarized as follows:
| Policy | Face amount |
| (1) Mutual Benefit Life Policy No. 265, 569, issued Nov. 1898. | $30,000 |
| (2) New York Life Policy No. 897,872, issued Oct. 1898. | 30,000 |
| (3) New York Life Policy No. 899,957, issued Nov. 1898. | 30,000 |
| (4) Union Central Life Policy No. 175,003, issued June 1898. | 30,000 |
| (5) Union Central Life Policy No. 175,004, issued June 1898. | 30,000 |
| (6) Union Central Life Policy No. 239,153, issued Feb. 1902. | 83,020 |
| (7) Northwestern Mutual Life Policy No. 163,896, issued Dec. 1887. | 30,000 |
| Payable | Premium |
| 30 annual installments of $1,000 each. | $1,800 annually or until 10 premiums paid. |
| 120 quarter-annual installments of $250 each. | $1,250.12 annually. |
| do | $1,812 annually or until 10 premiums paid. |
| 120 quarter-annual installments of $253.75 each. | $1,803.78 annually or until 10 premiums paid. |
| do | Do. |
| 140 quarter-annual installments of $593 each. | $5,561.50 annually or until 10 premiums paid. |
| Under option "B" annual installments of $55.75 for 25 years; amended so as to be payable monthly. | $2,208.90 annually or until 10 premiums paid. |
*809 A rider attached to each of the two New York Life policies provided that, should the primary beneficiaries die without issue prior to the death of the insured, then upon the death of the insured the *872 company would pay $19,350 to the executors, administrators, or assigns of the insured. A rider attached to each of Union Central Life Policies Nos. 175,003 and 174,004 provided that in the event of the death of all the primary beneficiaries without issue before the death of the insured, then upon the death of the insured the company would pay $18,000 to the executors, administrators, or assigns of the insured. A similar rider attached to Union Central Life Policy No. 239,153 provided that in such event the company would pay $50,000 to the executors, administrators, or assigns of the insured. The Northwestern Mutual Life policy provided that if no beneficiaries survived the insured payment was to be made, when due, to the executors, administrators, or assigns of the insured.
The insured reserved the right in each of the seven policies to change the beneficiaries, but at the time of death he had not exercised that right. The beneficiaries did not have the right under any*810 of the above described contracts to commute or anticipate any of the installment payments to be made to them, nor did they have the right to change or modify in any way the manner in which payments were to be made.
During the years 1935 and 1936 petitioner Thatcher received guaranteed installment payments under the seven policies in the respective amounts of $3,235.70 and $3,235.67. In 1935, 1936, and 1937 petitioner Huntzinger received such payments in the respective amounts of $3,235.70, $3,235.71, and $3,235.82. In 1936, 1937, and 1938 petitioner Wheeler received such payments in the respective amounts of $3,235.69, $3,235.70, and $3,235.70.
A life insurance premium under the ordinary life plan of life insurance is computed by the insurance company through the determination and use of three fundamental factors: First, the mortality table to be employed, that is, the rate of mortality assumed to prevail during the period covered by the policy; second, the rate to be used in determining the present value of payments in future years; and, third, the additional charges which must be added in order to cover expenses and contingencies. If the insurance policy is to be issued*811 under the 10-payment plan, under which the insured pays premiums for only 10 years, the insurance company computes the amount of the premium by discounting at the determined rate the present value of an annuity payable for 10 years instead of for life, making allowances for rate of deaths during the years in which the policy is in force.
From 1916 up through the taxable years the petitioners received the installment payments guaranteed under the terms of the contracts. No part of such payments received by petitioners Thatcher and Huntzinger from 1916 to 1934, inclusive, and no part of such *873 payments received by petitioner Wheeler from 1916 to 1933, inclusive, were reported by them as taxable income for those years. All of such payments received by petitioner Wheeler in 1934 and 1935, in the amount of $3,235.70 for each year, were included in her income for those years and tax was paid thereon. Of such payments received by petitioner Wheeler in 1936 and 1937, she reported the respective amounts of $1,174.61 and $1,174.62, in respect of which she claims an overpayment of taxes. No part of such payments received by her in 1938 was reported as taxable income.
For the*812 taxable years before us, the respondent has included in the taxable income of each petitioner the full amount of the installment payments received by him under the seven insurance contracts in the said taxable years. His explanation of such inclusions is that the total amounts received by each petitioner at the end of 1934 under the above described policies had exceeded the value of the policies at the date of the insured's death and that amounts received in excess of the value of the policies at the date of the insured's death constituted taxable income under article 22(b)(1)-1 of Regulations 86, 94, and 101.
Prior to 1929 petitioner Thatcher acquired 120 shares of common stock of the Washington Railway & Electric Co., sometimes referred to as Washington, at a cost of $10,200. Prior to 1929 petitioner Huntzinger acquired 60 shares of the same stock, at a cost of $5,101.20. In 1929 petitioner Thatcher exchanged his Washington stock for common stock of the North American Co. and in 1930 petitioner Huntzinger likewise exchanged her Washington stock for common stock of the North American Co. in transactions hereinafter described.
At all times material hereto, Washington had authorized*813 and outstanding 150,000 shares of stock consisting of 75,000 preferred and 75,000 common, both of which possessed equal voting rights. On July 3, 1929, and as early as April 4, 1928, the North American Co. owned 17,667 shares of preferred stock and 55,657 3/4 shares of the common stock of Washington, or a total of 73,324 3/4 shares, which constituted 48.8 percent of all the Washington stock outstanding. As of the same dates, 2,600 shares of preferred stock of Washington were owned by the North American Utilities Securities Corporation, a subsidiary of the North American Co. The total number of shares of Washington owned by the North American Co. and by its subsidiary was accordingly 75,924 3/4 shares, all of which had been acquired for cash and constituted a majority of the voting stock of Washington.
On July 3, 1929, the North American Co. sent a letter to all the common stockholders of Washington Railway & Electric Co. stating that certain holders of such stock had expressed a desire to exchange their holdings for common stock of the North American Co., which *874 was actively dealt in on the New York Stock Exchange and enjoyed a substantially broader market, and, further, *814 that:
Holders of the Common Stock of Washington Railway and Electric Company are now advised that those desiring to do so may exchange their holdings at the rate of one (1) share of such stock for five (5) shares of the Common Stock of The North American Company, provided they deliver the certificates for their stock to Central Hanover Bank and Trust Company, No. 70 Broadway, New York, N.Y., on or before July 31, 1929, accompanied by a letter of transmittal in the form enclosed. Certificates so forwarded must be duly endorsed in blank for transfer, or accompanied by stock power duly executed in blank.
* * *
* * * Common Stock of The North American Company delivered in exchange on or before July 31, 1929 will be entitled to the quarterly dividend declared payable on October 1, 1929 to stockholders of record on September 5, 1929.
The consolidated balance sheet of the North American Co. and subsidiary companies, dated March 31, 1929, shows total assets of $861,416,955.72, of which approximately $40,000,000 represented stock and bonds of other corporations, and total liabilities in the same amount which included 5,136,962 shares of common stock and $30,333,900 of preferred stock*815 outstanding.
On July 13, 1929, petitioner Thatcher mailed his stock certificates for 120 shares of Washington stock to the depository for the purpose of the exchange, on which date the market value of North American Co. common stock was $154.125 per share. On August 6, 1929, petitioner Thatcher received in exchange therefor certificates representing 600 shares of common stock of the North American Co., on which date the said stock had a market value of $179 per share.
On August 5, 1929, the directors of the North American Co. adopted a resolution extending the time in which the above mentioned offer to exchange its stock for that of Washington could be accepted by stockholders of Washington. The resolution provided that the officers of the company were authorized, in their discretion, to continue to acquire additional shares of common stock of Washington on the same basis as outlined above. This offer was still open in July 1930.
On July 19, 1930, petitioner Huntzinger mailed her stock certificates for 60 shares of Washington stock to the same depository for the purpose of the exchange, at which time the market value of the North American Co. common stock was $100.25 per*816 share. On August 2, 1930, petitioner Huntzinger received in exchange therefor certificates representing 300 shares of North American Co. commone stock, on which date it had a market value of $99.75 per share.
Pursuant to the offer of exchange made by the North American Co. on July 3, 1929, and as extended on August 5, 1929, that company by August 17, 1929, had acquired 6,128 additional shares *875 of common stock of Washington which, when added to the Washington stock owned by North American Co. prior to July 3, 1929, constituted a majority of the voting stock of Washington. A substantial amount of Washington stock still remains outstanding in the hands of persons other than the North American Co.
Petitioners Thatcher and Huntzinger each maintained a complete set of personal books. They employed bookkeepers and accountants to keep such books and to handle the preparation of their income tax returns. They employed L. T. Rule as their financial and tax adviser, and he supervised the keeping of their books and the preparation of their returns.
The transactions whereby petitioners exchanged their Washington stock for North American stock were entered on their books*817 as nontaxable transactions, the cost of the former being transferred to the latter. Under date of July 13, 1929, an entry was made on a ledger account kept by petitioner Thatcher showing that 120 shares of Washington stock had been exchanged for 600 shares of North American. Under date of July 26, 1930, an entry was made on a similar account kept by petitioner Huntzinger showing that 60 shares of Washington stock had been exchanged for 300 shares of North American. This latter entry had a notation to the effect that the exchange was made as of July 30, 1929. On that date the market value of the North American Co. stock was $149.50 per share. Similar entries were made on the journals kept by petitioners.
On October 11, 1929, petitioner Thatcher sold 100 shares of the North American Co. stock and in his income tax return for that year reported the transaction as follows: "North American Company common - Date Acquired 1917, Date Sold 1929, Amount received $16,064.75, Cost $1,658.54, Gain $14,406.21."
In 1931 an agent of the Bureau of Internal Revenue made an investigation of petitioner Thatcher's income tax liability for 1929, and in connection therewith examined his books and*818 records, including working papers, receipts, and documents for that year. Rule assisted him in making the examination. The agent also checked the North American ledger account maintained by petitioner, which account showed the 1929 sale of 100 shares thereof. The agent's written report of his investigation, dated May 12, 1931, stated in part as follows:
Financial History of Taxpayer: The taxpayer is an officer of the First National Bank of Pueblo, and owns numerous investments from which income is received.
He maintains a complete set of books which were checked.
Pursuant to the agent's report additional tax was assessed against petitioner Thatcher for the year 1929, but no adjustments were made in respect of the sale of the 100 shares of North American.
*876 In 1932 the same agent made a similar examination of the books, records, and working papers of petitioner Huntzinger for the year 1930, the year in which she exchanged her Washington stock for North American stock. Rule assisted him in making the investigation. Under date of September 2, 1932, she was notified by the Bureau of Internal Revenue that her return for the year 1930, subject to approval in Washington, *819 was being accepted as correct.
In 1935 petitioner Huntzinger sold 17 57/100 shares of North American common stock for $339.14. In computing her profit on the transactions she used her cost of the Washington stock as her basis for the North American stock and reported a capital gain of $44.67.
In 1936 petitioner Thatcher sold 70 shares of his North American stock to Mahlon Thatcher, Inc., a corporation controlled by him, and 21 shares to other persons. In computing his profit he likewise used his cost of the Washington stock as his basis for the North American stock and reported a capital gain of $2,076.28.
The parties have stipulated that if it is determined that the Washington-North American stock exchanges above described were taxable transactions, then the proper basis of the North American stock in the hands of petitioners Thatcher and Huntzinger is its fair market value on the date of acquisition, adjusted for certain stock dividends and the sale by petitioner Thatcher in the year 1929, provided they are not estopped or otherwise prevented from using such basis; that if the sales made by petitioner Huntzinger in 1935 resulted in deductible losses, such losses will be*820 subject to a capital loss limitation of 40 percent; and that if the sales made by petitioner Thatcher in 1936 resulted in losses, only those losses sustained on sales to persons other than Mahlon Thatcher, Inc., constitute deductible losses, and such deductible losses will be subject to a capital loss limitation of 40 percent.
Prior to 1936 petitioners Thatcher and Huntzinger acquired certain shares of preferred and common stock of the American-La France & Foamite Corporation, sometimes referred to as the old company, and during 1936 exchanged said stock for common stock and warrants of the American-La France-Foamite Corporation, Inc., sometimes referred to as the new company, in transactions hereinafter described.
On April 1, 1936, pursuant to a plan of reorganization under the Federal Bankruptcy Act, all the assets of the old company were transferred to the new company. Pursuant to the plan, an exchange of securities was effected as of July 7, 1936, at the following rates: For each $1,000 5 1/2 percent note due June 1, 1936, of the old company, a $1,000 5 1/2 percent note due June 1, 1956, plus 5 shares of common stock and 5 warrants to purchase common stock, of the new company, *821 or 105 shares of common stock and 5 warrants to purchase common stock of the new company; for each share of preferred stock of the *877 old company, one share of common stock and one warrant to purchase common stock of the new company; and for each share of common stock of the old company, one-tenth of one warrant to purchase common stock of the new company.
Pursuant to the plan, 600,000 shares of new $10 par common stock were authorized to be issued by the new company, of which 15,000 shares were reserved to be issued for the old company's notes, 57,429 shares were reserved to be issued for the old company's preferred stock, and 432,867.6 shares were reserved for the conversion of the 5 1/2 percent notes and warrants of the new company.
In due course, in accordance with the foregoing provisions of the plan, 15,000 shares of new common stock were issued in exchange for old 5 1/2 percent notes and 57,429 shares of new common stock were issued for old preferred stock. Of the said 15,000 shares of new common stock issued in exchange for old 5 1/2 percent notes, 2,500 shares were issued to noteholders owning stock of the old company and 12,500 shares were issued to noteholders*822 owning no stock of the old company.
As of December 31, 1936, there were outstanding 73,790 shares of new common stock, including the aforesaid 15,000 shares and 57,429 shares issued pursuant to the plan. The new common stock issued in connection with the plan constituted the sole class of stock issued by the new company and the amount thereof held by the stockholders of the old corporation after the exchange was consummated was less than 80 percent of the stock issued by the new company.
At the date of the exchange of securities, petitioner Thatcher was the owner of 1,600 shares of common stock and 115 shares of perferred stock of the old company, which he had acquired between 1916 and 1924, inclusive, at a total cost of $21,170, allocable in the amount of $9,040 to the preferred stock and $12,130 to the common stock. Pursuant to the plan he received in exchange for his preferred stock of the old company 115 shares of common stock and 115 warrants in the new company with a total value of $395.32 as of the date of exchange. He also received in exchange for his common stock of the old company 160 warrants in the new company with a total market value of $90 as of the date of*823 exchange.
In his tax return for the year 1936 petitioner Thatcher claimed a capital loss on account of this exchange in the amount of $20,759.37, limited at 30 percent to $6,227.81. The respondent in his determination of deficiency disallowed this loss on the theory that the exchange of securities was in connection with a nontaxable reorganization.
At the date of the aforesaid exchange of securities petitioner Huntzinger was the owner of 618 shares of common stock and 46 shares of preferred stock of the old company, which she had acquired in the period between November 1916 and January 23, 1926, at a total *878 cost of $8,044, allocable in the amount of $4,444 to the common stock and $3,600 to the preferred stock. Pursuant to the plan she received in exchange for her common stock of the old company 61.8 warrants to purchase common stock of the new company with a total market value as of the date of said exchange of $34.76. She also received in exchange for her preferred stock of the old company 46 warrants to purchase common stock and 46 shares of common stock of the new company, with a total market value of $158.13.
In her tax return for the year 1936 petitioner*824 Huntzinger claimed a capital loss on account of this exchange in the amount of $7,880.85, limited at 30 percent to $2,364.26. The respondent in his determination of deficiency disallowed this loss on the theory that the exchange was made in connection with a nontaxable reorganization.
OPINION.
TURNER: The question raised by the first issue is whether there should be excluded from gross income of the petitioners the installment payments received by them under the insurance policies described in our findings. This is a question of law and involves the interpretation of sections 22(b)(1) of the Revenue Acts of 1934, 1936, and 1938, which are identical and read as follows:
SEC. 22. GROSS INCOME.
* * *
(b) EXCLUSIONS FROM GROSS INCOME. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) LIFE INSURANCE. - Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income).
Applying article 22(b)(1)-1*825 of Regulations 86, the respondent, in determining the deficiencies here involved, has included in the income of the petitioners for the years before us the full amount of the installments received in those years under the insurance contracts above described. In support of such action, he states that these petitioners, prior to the years in question, had received in the aggregate amounts equal to or in excess of the amounts that would have been payable under contracts providing for the payment of insurance proceeds to beneficiaries in a lump sum at the death of the insured but in all other respects identical with the contracts before us, and that all amounts received in excess of the lump sum which would have been payable at the death of the insured had the contracts so provided constitute income. On brief, he makes an elaborate argument to the effect that since insurance companies, in arriving at the amount of the installments payable under contracts providing for such payment of the insurance proceeds, apply a percentage rate *879 to the amount that would have been payable had the contract provided for payment in a lump sum at the death of the insured, therefore the pro rata*826 part of each installment attributable to such percentage rate represents interest and the remainder principal. Regardless of such argument, however, he still contends for the conclusion that the full amount of the installments received by these petitioners in the years here involved is income.
This same question was considered by us in , and we there sustained the petitioner's contention that annual installments of life insurance received by the beneficiary after the death of the insured were excluded from gross income by section 22(b)(1), supra. In the opinion of that case we reviewed the legislative and judicial history of the statute and concluded that the respondent's interpretation thereof, as set forth in his regulation, could not be sustained. Our decision was affirmed by the United States Circuit Court of Appeals for the First Circuit, . There the court likewise held that the respondent's regulation above mentioned was contrary to the expressed intention of Congress and was invalid. Shortly thereafter the same conclusion was reached by the United States*827 Circuit Court of Appeals for the Second Circuit, . To the same effect is , decided since the hearing in this proceeding.
The respondent concedes that in the cases above cited the taxpayers successfully challenged the validity of the regulation of which he relies, but argues that those cases are distinguishable and, further, that in so far as they deny his contentions they are erroneous. He fails to point out any material distinction, however, and, in view of the decisions cited above, further and extended discussion here seems to us unnecessary. We accordingly hold that the installment payments received by the petitioners under the seven insurance contracts are to be excluded from their gross income under section 22(b)(1), supra. Cf. .
The question raised by the second issue is whether the exchanges by petitioners Thatcher and Huntzinger in 1929 and 1930 of their Washington stock for stock of the North American Co. were made in pursuance of a plan of reorganization and*828 the stock exchanged and the stock received were the stock of corporations parties to the reorganization. If so, the basis of the North American stock in the hands of the petitioners was the same as the basis of their Washington stock. Sec. 113(a)(6), Revenue Act of 1928. In section 112(b)(3) it is provided that "No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or *880 securities in such corporation or in another corporation a party to the reorganization." In section 112(i)(1)(A) of the Revenue Act of 1928 it is provided that the term "reorganization" means "a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation * * *)." It is the contention of the petitioners that the transactions whereby they exchanged their Washington shares for North American shares was not an exchange within the meaning of section 112(b)(3), but was an exchange in respect of which the gain was recognized and*829 that the basis of the North American stock to them for the purpose of determining gain or loss was therefore its fair market value when acquired.
The exchanges of the Washington stock for North American stock were made pursuant to the offer contained in the letter dated July 3, 1939, by North American to the common stockholders of Washington. At or prior to that date North American was the owner of 73,324 3/4 shares, or 48.8 percent of all the Washington stock outstanding, all of such outstanding stock being voting stock. Washington had nothing to do with the offer and was not a party thereto. No change in either Washington or North American or in their business operations other than the acquisition by North American of additional common stock of Washington was contemplated or made. As the result of the offer and in accordance with its terms, North American by August 17, 1929, had acquired 6,128 additional shares of common stock of Washington and it thereafter directly owned a majority of the voting stock and a majority of the total mumber of shares of all classes of Washington stock then outstanding.
It is the contention of the respondent that these facts make of the transaction*830 a reorganization within the meaning of section 112(i)(1)(A), supra, and bring the exchange by the petitioners of their Washington shares for North American shares within the provisions of section 112(b)(3). He relies particularly on , and . In the instant case the facts in our opinion not only fail to show the existence of a plan of reorganization, but to the contrary indicate the absence of one. North American was already the owner of 48.8 percent of the entire outstanding stock of Washington, which stock had been acquired by it for cash, and the only plan involved in the offer of July 3, 1929, was the plan to acquire such additional shares of Washington's common stock as might be offered in exchange for North American common stock. Furthermore, even though it be assumed that a plan to acquire additional common shares of Washington, under the facts and circumstances outlined, did constitute a plan of reorganization within the meaning of section 112(i)(1)(A), *881 supra, there is no basis of fact whatever for any conclusion that Washington was a party to such*831 plan. The factual situations in , and , are entirely different and amply distinguish those cases from the instant case. Cf. ; ; and . We accordingly conclude that the exchange by the petitioners of their Washington shares for North American shares in 1929 and 1930 did not fall within the provisions of section 112(b)(3), supra, and under the statute the gain realized from such exchange was recognizable.
The respondent pleads, however, that in any event petitioners are estopped to claim as the basis for the North American stock its fair market value at the time of acquisition. On brief, he states that he is not contending that petitioners are estopped within the usual confines of the doctrine of estoppel, but is contending, citing , that petitioners, having taken the position in the earlier years that the exchanges of their Washington stock for North American stock were nontaxable, *832 may not now change their position to the detriment of the revenue. He admits that there was no misrepresentation or deception practiced upon him, but contends that this matter was not brought to his attention prior to the running of the statute of limitations on the years in which the exchanges were made.
This latter contention of the respondent seems contrary to the stipulated facts. It has been stipulated that in 1931 an examining agent of the Commissioner made an examination of the books and records of petitioner Thatcher for the year 1929 and "in his examination checked the North American Company common stock ledger account of the petitioner" in connection with a sale of such stock in 1929, and in his report dated May 12, 1931, stated that "He maintains a complete set of books which were checked." In computing his gain on the 1929 sale of North American stock petitioner Thatcher used as a basis therefor his cost of the Washington stock which had been exchanged therefor. It is also stipulated that in 1932 the same examining agent made an examination of the books and records of petitioner Huntzinger for the year 1930, the year in which she acquired the North American stock, *833 and she was later notified that, subject to approval in Washington, her return for 1930 was being accepted as correct. We do not know the details of the respondent's examination, but it can not now be said that the transactions in the prior years were not called to his attention.
The question of estoppel was considered and discussed at some length in , and ; affd., . In the latter case the respondent advances without success the same contentions *882 which he now advances in the instant case. We do not think that case can be satisfactorily distinguished from the instant case. Since the respondent had knowledge of the transactions in the prior years and concedes that no misrepresentation or deception was practiced upon him, we find no basis for his plea of estoppel.
Petitioner Thatcher mailed his Washington stock certificates to the depository on July 13, 1929, and petitioner Huntzinger mailed her certificates on July 19, 1930. The North American certificates were received by Thatcher on August 6, 1929, and by petitioner Huntzinger*834 on August 2, 1930. The petitioners contend that the basic dates, for purposes of valuing the North American stock, were the respective dates on which they received their stock certificates. We do not think so. The basic dates for valuing the stock were the dates on which they were entitled to receive the stock and not the dates on which the certificates were delivered to them. . , relied on by petitioners, is clearly distinguishable. On the basis of the record here, we conclude that they were entitled to receive such stock on the dates that they accepted the offer made by North American, that is, the dates on which they mailed their Washington stock certificates to the depository.
The question raised by the last issue is whether the transaction whereby petitioners Thatcher and Huntzinger exchanged their stock in the American-La France & Foamite Corporation for stick and warrants in American-La France-Foamite Corporation, Inc., was a reorganization within the meaning of section 112(g) of the Revenue Act of 1936. 1 The respondent contends that the transaction was a reorganization*835 within the meaning of section 112(g)(1)(C) and under section 112(b)(3) of the act, the loss sustained by reason of such exchange is not to be recognized.
Petitioners contend that, since immediately after the transfer neither the transferor corporation nor its stockholders were in "control", section 112(h), 2 of the new corporation, it was not a reorganization within the meaning of the act and that they are accordingly entitled to deduct the losses sustained.
*836 Since the filing of briefs in this case, the Supreme Court has decided that bondholders of a transferring corporation can not, for the *883 purpose of satisfying the 80 percent control provision, be regarded as "stockholders." . But, argues the respondent, here 2,500 shares of the new corporation were issued to noteholders of the old corporation who were also stockholders of the old corporation and when these 2,500 shares are added to those acquired by the other stockholders, then the 80 percent control requirement will be satisfied. The error in this argument is that such noteholders acquired the 2,500 shares of stock of the new corporation by exchanging their notes and not by reason of the fact that they also happened to be stockholders. This fact, in our opinion, is fatal to the respondent's contention. We hold that the transaction was not a reorganization within the meaning of the act and that petitioners are entitled to deduct the losses claimed.
Petitioner Thatcher now concedes that in 1935 and 1936 he received dividends on Northwestern Mutual Life Insurance policy No. 163,896 in*837 the respective amounts of $156.31 and $52.32 and that, such amounts being in excess of the guaranteed installments payable under the policy, are includible in his taxable income for those years. Petitioner Huntzinger concedes that she similarly received during the years 1935, 1936, and 1937 the respective amounts of $156.44, $52.32, and $39.32 and that those amounts are includible in her taxable income for those years. Petitioner Wheeler also concedes that for the years 1936, 1937, and 1938 she received under the same policy payment of dividends in excess of the guaranteed installments payable thereunder and that such dividends are includible in her taxable income for said years.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
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(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means * * * (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred * * *. ↩
2. (h) DEFINITION OF CONTROL. - As used in this section the term "control" means the ownership of stock possessing at least 80 percentum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩