*2413 Held that the cash paid for stock was its entire purchase price and that no part of the price was paid in services.
*351 The proceeding in Docket No. 24527 is for the redetermination of a deficiency in income tax of $2,339.77 for 1923. The only issue relates to the basis for the determination of profit realized by the petitioner on the sale in 1923 of corporate stock purchased in 1914.
FINDINGS OF FACT.
The petitioner is an individual residing at Hartford, Conn. About 1898 he began to sell automobiles and motor vehicles. In 1910 he organized and became the directing head and principal stockholder of the Buick Garage Co., a corporation with its place of business at Hartford. The name of the corporation was subsequently changed to the Hartford Buick Co. The corporation had the Hartford agency for Buick automobiles and its business was to buy automobiles from a distributor and sell them to the public.
For several years prior to 1910 the petitioner had been acquainted with Harry K. Noyes, of Boston, who had*2414 been a distributor of automobiles *352 since about 1900 and who operated the Noyes Buick Co. of Boston. This company was the distributor of Buick automobiles in the New England territory, which took from 15 per cent to 22 per cent of the Buick automobiles manufactured. Being desirous of having the territory further developed and successfully operated, Noyes, about the first part of 1913, approached the petitioner concerning the organization and operation of a corporation to sell Buick automobiles at Springfield, Mass. At that time Noyes stated to the petitioner that he (the petitioner) would be compensated at some future time and in some undisclosed way for his services. In April, 1913, the corporation was organized under the name of the Springfield Buick Co. Upon organization of the corporation the 100 shares of its capital stock of a par value of $100 each were issued 50 shares to the Hartford Buick Co. and 50 shares to Noyes. Of the 50 shares issued to the Hartford Buick Co., 37 1/2 were paid for in cash in the amount of $3,750 and the remaining 12 1/2 shares were issued for good will. The same is true with respect to the 50 shares issued to Noyes. Of the petitioner's*2415 $10,000 par value capital stock outstanding during 1913, 1914, and 1915, only $7,500 was paid for in cash.
Upon the formation of the Springfield Buick Co. the petitioner was directly in charge of it. He opened business in a temporary store and immediately made arrangements for obtaining larger quarters and for constructing buildings to house the corporation's activities. The petitioner arranged or set up three departments - sales, parts, and service, for carrying on the corporation's business. He selected the personnel for these departments, consisting of one person for the parts department, three for the service department, and from two to five for the sales department. Some of these after their selection were trained in the Hartford Buick Co.'s establishment, while the petitioner took others from that establishment and placed them in the employment of the Springfield Buick Co. The petitioner also arranged for obtaining such loans as the Springfield Buick Co. required. After getting the operations of the Springfield Buick Co. started, which required a great deal of the petitioner's time, he continued until July, 1914, to give to the affairs of the corporation so much of his*2416 time as was needed to supervise the going organization.
The petitioner was treasurer of the Springfield Buick Co. during the years 1913, 1914, and 1915. The company reported a loss in its income-tax return of $412.40 for 1913, a net income of $5,847.26 for 1914, and a loss of $7,821.38 for 1915.
Although during a part of 1913 and of 1914 the petitioner went back and forth from his residence at Hartford to Springfield, a distance of 26 miles, in looking after the establishment of the Springfield *353 Buick Co. and getting its business in a going condition, he continued to serve as president of the Hartford Buick Co. While he did not give to the latter company his entire time, he looked after all of its important correspondence, purchased all of the cars sold by it, looked closely after the sales and had general supervision of the service department. During this time the number of employees of the Hartford Buick Co. ranged from about 25 in the summer season down to 8 or 10 at other times. In 1913 the petitioner was also interested in the real estate business. However, during the years 1913, 1914, and 1915 the number of transactions he entered into did not exceed ten.
*2417 For 1913 the Hartford Buick Co. reported in its income-tax return a loss of $1,400.69, for 1914 a profit of $1,223.20, and for 1915 a profit of $8,699.74. The 1914 return shows that the petitioner as president and treasurer was paid compensation of $5,482 and the return for 1915 shows the compensation to be $8,000.
By July, 1914, suitable managers had been obtained to operate the business of the Springfield Buick Co. and its affairs were in such condition that Noyes thought that the petitioner could be relieved of the duties he had been performing. Thereafter the petitioner continued to act in an advisory capacity and retained his position on the board of directors of the Springfield Buick Co.
In July, 1914, the Hartford Buick Co. still owned the 50 shares of stock in the Springfield Buick Co. which it acquired at the time of the organization of that company. About the time in July, 1914, that the petitioner began to act only in an advisory capacity with respect to the business of the Springfield Buick Co., the Hartford Buick Co. sold to Noyes for $5,000 cash the 50 shares of stock of the Springfield Buick Co. then owned by it. At this time the petitioner was the principal*2418 stockholder and the active head of the Hartford Buick Co. Within two or three days after the sale of the 50 shares of the Springfield Buick Co. stock to Noyes, the petitioner purchased the same 50 shares of stock from Noyes for $5,000, giving his notes in payment therefor. The petitioner paid the notes on May 4, 1915, and on that day a certificate for the stock was issued to him. The petitioner did not report in his income-tax return for 1914, 1915, or for any later year any income derived by him from the acquisition of the stock on account of any service rendered by him.
In 1923 the petitioner sold the 50 shares of stock for $26,520. He considered that the fair market value of the 50 shares of stock at the time he acquired it was $20,000. In his income-tax return for 1923 he reported as profit from the transaction the difference between the selling price and the $20,000. The respondent determined that the amount of profit from the transaction was the difference between *354 the selling price and $5,000, the amount paid in cash by the petitioner for the stock.
The stock acquired by the petitioner had a fair market value not in excess of the amount of cash paid by*2419 him for it and no part of the purchase price was represented by services.
OPINION.
TRAMMELL: The parties stated at the hearing that the proceedings in the two dockets here involved were to be consolidated. However, an examination of the petitioner in Docket No. 22483 shows that the appeal was not taken from notice of a determination of a deficiency, but from a letter from the respondent advising the petitioner of the privilege of having a hearing in the Income Tax Unit with respect to his tax liability for 1923 prior to a final determination of such liability. Since the petitioner was not based upon a notice of a determination of a deficiency, we have no jurisdiction of it and it will therefore be dismissed. An order will be entered accordingly.
With respect to the proceeding in Docket No. 24527, it appears that the testimony was not directed to support the allegations of the petition. The issues raised by the pleadings constitute the only issues we are called on to decide. The only error assigned was: "In determining the profit on the sale of stock of a close corporation (the Springfield Buick Co.) the Commissioner refuses to use the fair market value at the time of*2420 its acquisition as the basis for his calculation."
At the hearing counsel for the petitioner stated that the question was not the value of the stock; but the value of petitioner's services.
The petitioner contained the allegation: "The Buick Garage Company to which the Hartford Buick Company succeeded needing capital in July, 1914, sold the 50 shares to the Springfield Buick Company for $5,000.00 in cash."
The petitioner devoted his testimony to show that this allegation was not true, but that the stock actually cost $20,000, $5,000 in cash and $15,000 in services. Yet he did not seek to amend the pleadings. If the petitioner had desired to abandon the issues originally raised by the pleadings and to raise another issue, he had his remedy by timely amending the petitioner. We can not render a decision on an issue not raised.
The petitioner does not now contend that he is entitled to a decision in his favor on the issue presented in the pleadings, and, clearly, he is not. The statute has prescribed that cost is the basis for determining gain or loss on assets acquired subsequent to March 1, 1913.
We find much reluctance in the necessity as we see it of deciding a cause*2421 on the inadvertance of counsel or a slip in pleading. Clearly, *355 a cause should go off on such a point only when required by some rule of law, the observance of which is deemed essential to the proper functioning of the Board.
The Board, by statute, is given power to make rules of procedure. Pursuant to such authority, the Board has prescribed by rule that:
A proceeding shall be initiated by filing * * * a petition * * *. It shall contain:
(d) Clear and concise assignments of error alleged to have been committed by the Commissioner.
The rule is fundamental that a plaintiff must recover, if at all, on the case made by his declaration, and if he fails to prove his cause of action as laid, or proves an entirely different one, he can not recover. ; ; ; ; ; *2422 ; American Ry. Express Co. v. Stanley, 92 Sou. 642; ; ; ; . See also ; ; .
If we consider the merits alone, in our opinion, the petitioner is not entitled to a decision in his favor. From the evidence it seems to us clear that the stock was not at the time purchased by the petitioner worth in excess of the $5,000 paid for it in cash. While the petitioner expressed his opinion that the stock was worth in excess of $20,000 when he purchased it, the actual facts in the record are inconsistent with this valuation. The Hartford Buick Co., of which the petitioner was the principal stockholder and active head, sold the same stock to Noyes only two or three days before Noyes sold it back to the petitioner. It is not explained why the Hartford Buick*2423 Co. sold stock for $5,000 if it was worth $20,000 or $25,000, and no fact are shown which would warrant such an increase within two or three days from $5,000 to $20,000 or $25,000. If the earnings be considered in determining the value, the stock was not worth even the $5,000. But since the petitioner paid that amount in cash, that represents its cost, which is the fact to be determined. Being of this opinion we think that it is clear that the petitioner did not receive any compensation for services when he acquired the stock. If Noyes was to pay the petitioner for his services, he did not do so when he sold the stock to him. We do not see how it could be seriously contended that the petitioner received compensation for services in acquiring the stock, when he paid in cash all that the *356 stock was worth at the time. The services may well have been worth $15,000, but if they were, the petitioner has not received that amount or any amount for them, so far as this record is concerned.
We must therefore affirm the Commissioner's determination.
Judgment will be entered for the respondent.