*1145 BASIS OF COST OF STOCK RECEIVED IN NONTAXABLE EXCHANGE SPLITUP. - On September 3, 1929, petitioner was the holder of 54,054 shares of stock, $10 par value, in the Packard Motor Car Co. On that date he received in exchange for these shares 270,270 shares of stock, no par value, in the same company, representing a splitup of 5 for 1. In the taxable year 1930 the petitioner sold 25,000 shares of the 270,270 shares thus received. Held, the basis for computing the gain on the sale is the average cost of each of the 270,270 shares received in exchange, according to the rule laid down in Christian W. Von Gunten,28 B.T.A. 702, and Olive Hume Oliver,30 B.T.A. 1381.
*154 In this proceeding respondent has determined a deficiency of $11,190.75 against petitioner for the year 1930. The deficiency results from a change made by respondent in the cost basis of 25,000 shares of Packard Motor Car Co. stock, sold by petitioner during the taxable year, over that used by petitioner in his income tax return for the year in question. *1146 In the statement attached to the deficiency notice respondent explains the change which he has made in the basis of cost in the following language:
(a) and (b). The adjustments to ordinary net income and capital net gain result from the changed method of determining the cost of various shares of Packard Motor Car stock, it being held that as a result of declaration of various stock dividends and a five for one split-up of the Packard stock, it is not possible to identify all of such shares as were sold during 1930, and, therefore, the provisions of article 600(3) of Regulations 74 are controlling.
The contention that the first in first out method should be applied to the stock certificates received upon the split-up of the stock in question has been denied since it appears that this is merely a manner of identifying the numbers of the certificates.
To this determination of respondent petitioner assigns the following errors:
(a) The respondent erred in holding that 25,000 of the 40,000 shares of Packard stock sold in 1930 had not or could not be identified, and in recomputing the profit on their sale at $517,634.07, or at any amount in excess of $24,000 ordinary gain plus*1147 $389,708.05 capital net gain.
(b) Even if the respondent was correct in applying the "first in, first out rule" he erred in failing to first apply it to the certificates for the new shares received on the 5 to 1 split-up of old shares in 1929.
The proceeding was submitted on an agreed statement of facts and oral testimony, from which we make the following findings of fact.
*155 FINDINGS OF FACT.
Petitioner purchased shares of common stock, par value $10 each, of the Packard Motor Car Co. (different purchases being identified for convenience by lot numbers) as follows:
| Date of | Number of | ||
| Lot No. | purchase | shares | Cost |
| 1 | May 1922 | 3,500 | $54,575.00 |
| 2 | June 1922 | 500 | 7,275.00 |
| 3 | Oct. 1922 | 1,000 | 17,537.50 |
| 4 | Nov. 1922 | 7,000 | 129,325.00 |
On December 16, 1922, the company distributed a 100 percent common stock dividend, and petitioner received, with respect to the shares purchased as set forth in the preceding paragraph, 12,000 additional shares of such stock as a stock dividend.
Thereafter petitioner purchased further shares of such stock as follows:
| Date of | Number of | ||
| Lot No. | purchase | shares | Cost |
| 5 | Aug. 1923 | 8,300 | $111,118.00 |
| 6 | Feb. 1925 | 10,000 | 165,187.50 |
| 7 | Mar. 1925 | 1,100 | 19,925.00 |
| 8 | June 1925 | 200 | 5,955.00 |
*1148 On December 1, 1925, the company distributed a 10 percent common stock dividend, and petitioner received, with respect to the 43,600 shares acquired as set forth in the preceding three paragraphs, 4,360 additional shares of such stock as a stock dividend.
On August 31, 1926, the company distributed a 15 percent common stock dividend and petitioner received, with respect to the 47,960 shares acquired as set forth in the four preceding paragraphs, 7,194 additional shares of such stock as a stock dividend.
In April 1927 petitioner sold 2,300 shares of the stock purchased in February 1925, described as lot No. 6, and delivered certificates for 2,300 shares identified as having been acquired as part of lot No. 6. In April 1927 he also sold 100 shares of the stock acquired as a stock dividend on December 1, 1925, and 100 shares of the stock acquired as a stock dividend on August 31, 1926, and in each instance delivered certificates identified as having been acquired at the time of such respective stock dividends.
Thereafter petitioner purchased further shares of such stock as follows:
| Date of | Number of | ||
| Lot No. | purchase | shares | Cost |
| 9 | Sept. 1927 | 600 | $24,690.00 |
| 10 | Aug. 1928 | 800 | 59,340.00 |
*1149 *156 On September 3, 1929, at which time petitioner owned 54,054 shares of such stock, acquired as above set forth, the common stock was split up into 5 new no par value shares for each old $10 par value share, and petitioner exchanged his 54,054 old shares for 270,270 such new shares, receiving certificates therefor, each in the amount of 100 shares, as follows: No. 25136 for 70 shares; Nos. 49862 to 51271, inclusive, for 141,000 shares; and Nos. 54172 to 55463, inclusive, for 129,200 shares.
In December 1929 petitioner purchased 15,000 shares of such new no par value stock (this purchase being referred to hereinafter as lot No. 11) at a cost of $230,625, receiving therefor certificates Nos. DU-1751 to 1765, inclusive, for 1,000 shares each. In April 1930 petitioner sold 15,000 shares of the no par value stock for $306,000 and delivered to the purchaser the certificates Nos. DU-1751 to 1765, inclusive, for 15,000 shares, being the identical shares purchased by petitioner in December 1930 and referred to above as lot No. 11.
In April 1930 petitioner also sold 25,000 additional shares of the no par value stock for $548,450, and delivered the following numbered certificates, *1150 acquired at the time of the splitup in September 1929: Nos. 54272 to 54321, inclusive; Nos. 54472 to 54571, inclusive; and Nos. 54861 to 54960, inclusive.
Petitioner maintained account books which showed, with reference to such Packard Motor Car Co. common stock, the date of purchase of each lot of stock, the number of shares bought, the cost, the date and amount of each stock dividend, the date of each sale, the number of shares sold, the sale price, and the computation of the profit on each sale.
Petitioner before the sale of the 40,000 shares in 1930 instructed his assistant, who handled his personal financial matters, to sell those shares which had cost the most and on which the taxable gain would be the least. His intention was to sell those lots which had been acquired by the most recent purchases, as they were acquired at the highest prices.
Petitioner's assistant carried out the instructions so received in the following manner: He examined petitioner's personal ledger and journals and ascertained therefrom those lots which he claimed were acquired at the highest prices and instructed the bookkeeper to sell the same. A broker was authorized to make sales in small*1151 lots and the entire 40,000 shares were sold between April 7 and April 23, 1930. Immediately upon receipt of the broker's sales slips entries were made on the books.
*157 The April 1930 journal entry reads in part as follows:
The 40,000 shares of Packard stock sold in April were purchased as follows:
| 323 shrs. Bal. of stock purchased 2/25/25 | |
| Plus 32.3 10% stock div. | |
| ------- | |
| 355.3 | |
| Plus 53.3 15% stock div. | |
| ------- | |
| 408.6 | |
| Plus 5 shrs. for one | |
| ------- | |
| 2043 cost-------------------------------------------------- | ---4,958.20 |
| ------- | |
| 1100 shrs. purchased Mar. 1925 | |
| 200 shrs. purchased June | |
| ------- | |
| 1300 | |
| Plus 130 10% stock div. | |
| ------- | |
| 1430 | |
| 214 15% stock div. | |
| ------- | |
| 1644 | |
| Plus 5 shrs. for one | |
| ------- | |
| 8220 cost-------------------------------------------------- | --25,880.00 |
| ------- | |
| 1223 shrs. of 2100 purchased 2/25/25 | |
| Plus 122.3 10% stock div. | |
| ------- | |
| 1345.3 | |
| Plus 202.0 15% stock div. | |
| ------- | |
| 1547.3 | |
| Plus 5 shrs. for one | |
| ------- | |
| 7737 cost * * * ------------------------------------------- | --19,873.75 |
| ------- | |
| 600 shrs. purchased Sept. 23.27 | |
| Plus 5 shares for one | |
| ------- | |
| 3000 cost-------------------------------------------------- | --24,690.00 |
| ------- | |
| 800 shrs. purchased Aug. 1928 | |
| Plus 5 shrs. for one | |
| ------- | |
| 4000 cost-------------------------------------------------- | --59,340.00 |
| ------- | |
| 15000 purchased Dec. 1929 cost----------------------------- | -230,625.00 |
| ------- | |
| 40,000----------------------------------------------------- | -365,366.95 |
*1152 Total cost of above 40,000 shares. See page - this book for itemization of selling price. This entry to reduce Inventory a/c.
* * *
| Amt. received for 40,000 shrs. Packard Stock sold April 1930 | 854,450.00 |
| Cost of above as per pages - this book | 365,366.95 |
| ----------- | |
| Profit | 489,083.05 |
*158 The entries so made in April 1930 on petitioner's books sought to identify the 25,000 shares sold as being 1,546 of the shares originally acquired in lot No. 6, all the shares originally acquired in lots Nos. 7, 8, 9, and 10, and all the shares received as stock dividends with respect to such original acquisitions.
In his 1930 income tax return petitioner computed and reported the gain derived from the sale of the 25,000 shares as follows:
| Shares | Cost | Sales | Profit | |
| 4,000 | Ordinary gain | $59,340.00 | $83,340.00 | $24,000.00 |
| 21,000 | Capital gain | $75,401.95 | 465,110.00 | 389,708.05 |
| ------ | ----------- | ---------- | ---------- | |
| 25,000 | $134,741.95 | 548,450.00 | 413,708.05 |
The profit thus reported for taxation agrees with the entries made in petitioner's books in April 1930.
In his determination of the deficiency here in question*1153 the Commissioner held that the 25,000 shares could not be identified and that the provisions of article 600(3) of Regulations 74 are controlling (page 2 of statement attached to deficiency letter). Such provision reads as follows:
(3) Where the stock in respect of which a distribution in reorganization is made was purchased at different times and at different prices, and the identity of the lots can not be determined, any sale of the original stock will be charged to the earliest purchases of such stock (see article 58), and any sale of the stock distributed in reorganization will be presumed to have been made from the stock distributed in respect of the earliest purchased stock.
The Commissioner held the entire amount of the profit on the sale of the 25,000 shares to be taxable as a capital gain, and computed the amount of such gain to be $517,634.07, this being the difference between the sale price of $548,450 and a "cost" or basis of $30,815.93.
The basis of $30,815.93 used by the Commissioner in determining the profit on the sale of the 25,000 shares was derived from an elaborate and complicated computation made by a revenue agent, which consumed 11 full pages of the agent's*1154 report. In such computation it was presumed that the 25,000 shares sold in 1930 were those received in the 1929 five-for-one distribution in respect of 3,500 shares purchased in May 1922 - designated heretofore as lot No. 1 - and in respect of 1,500 shares received December 16, 1922, as a 100 percent stock dividend on the shares so purchased in May *159 1922. The Commissioner's computation of such basis may be summarized as follows:
| Lot No. 1 | ||
| Shares | Cost | |
| May 1922, purchased | 3,500 | $54,575.00 |
| Less amount allocated to shares acquired as a 100% | ||
| stock dividend Dec. 16, 1922, lot No. 1(a) | ----- | 27,287.50 |
| ------------------- | ||
| Balance | 3,500 | 27,287.50 |
| Less amount allocated to shares acquired | ||
| as a 10% stock dividend Dec. 1, 1925 | ------ | 2,480.68 |
| ------------------- | ||
| Balance | 3,500 | 24,806.82 |
| Less amount allocated to shares acquired | ||
| as a 15% stock dividend Aug. 31, 1926 | ------ | 3,235.67 |
| ------------------- | ||
| Balance | 3,500 | 21,571.15 |
| ------------------- | ||
| Sept. 3 1929, split 5 for 1 | 17,500 | 21,571.15 |
| ------------------- | ||
| Lot No. 1(a) | ||
| Dec. 16, 1922, stock dividend | 3,500 | 27,287.50 |
| Less amount allocated to shares acquired | ||
| as a 10% stock dividend Dec. 1, 1925 | ------ | 2,480.68 |
| ------------------- | ||
| Balance | 3,500 | 24,806.82 |
| Less amount allocated to shares acquired | ||
| as a 15% stock dividend Aug. 31, 1926 | ------ | 3,235.67 |
| ------------------- | ||
| Balance | 3,500 | 21,571.15 |
| ------------------- | ||
| Sept. 3, 1929, split 5 for 1 | 17,500 | 21,571.15 |
| ------------------- | ||
| Presumed to have been sold: | ||
| All of lot No. 1 | 17,500 | 21,571.15 |
| Part of lot No. 1(a) | 7,500 | 9,244.78 |
| ------------------- | ||
| Total | 25,000 | 30,815.93 |
*1155 OPINION.
BLACK: From the foregoing findings of fact it will be seen that in the taxable year petitioner sold 40,000 shares of his holdings of Packard Motor Car Co. stock. Fifteen thousand shares were of a purchase made after the splitup of September 3, 1929. As to the profits on this block of 15,000 shares, there is no controversy. Of the 40,000 shares sold, 25,000 were acquired in the splitup, and it is concerning the taxable profit on these 25,000 shares that the controversy arises. Petitioner has sought by a method of bookkeeping to identify the 25,000 shares of stock in question with some of the later higher priced purchases made prior to the splitup. By this method he allocates the 25,000 shares sold to the higher cost stock and thereby reduces the taxable gain. This of course would be permissible if the shares sold could be actually identified as being part of the higher priced purchases, but it seems plain that there can be no such identification. What petitioner has done is a mere mental process, and this does not amount to an identification in fact.
Petitioner's counsel in his opening statement at the hearing stated that "Neither the books of the petitioner*1156 nor those of the Packard Company give information sufficient to identify the newly acquired *160 stock certificates with specific shares of previously held stock." The accuracy of this statement seems to be quite well borne out by the evidence in the case.
Because there could be no actual identification of these 25,000 shares with the later bought higher cost shares, as petitioner endeavored to make, respondent contends that article 600(3) of Regulations 74, familiarly known as the first in, and first out rule, applies. We see no reason for the application of the first in, first out rule in the present proceeding. What petitioner did was to sell 25,000 shares of a lot of 270,270 shares, which he acquired in a splitup September 3, 1929. The cost of these 270,270 shares was the aggregate cost of all the shares for which they were exchanged. The basis of each of the 25,000 shares sold is the aggregate cost of all the shares owned by petitioner at the time of the exchange, September 3, 1929, divided by 270,270 shares received by petitioner in exchange on that date. This is in accordance with the rule laid down by the Board in *1157 Christian W. Von Gunten,28 B.T.A. 702, and Olive Hume Oliver,30 B.T.A. 1381. The latter case seems particularly in point with the case at bar. In that case there had been two or three splitups of stock of the Standard Sanitary Co. shares and finally a statutory reorganization with the American Radiator Co. After reciting the facts connected with these several transactions, we stated, in discussing the first in, first out rule, as follows:
The first in, first out rule was adopted as a rule of convenience, in the absence of clear evidence as to the identity of lots sold and their cost. When all lots purchased and acquired by stock dividend distributions are exchanged for new shares of a different par value, the cost of all of the shares exchanged becomes the basis of the total shares received. The shares received are one lot acquired at the same time, whether the number of shares acquired is represented by one or more certificates. Hence, there is no necessity for such a rule. The question here involved was suggested in *1158 Mickler Holding Co.,29 B.T.A. 300, but was not decided.
Again, in the concluding part of the opinion, we said:
It would appear from these comments that it was the intention of the framers of the act that the cost of all the property exchanged should be considered to be the cost of all property received. This being the case, and the language of the statute carries this meaning, there is no occasion for treating any particular part of stock received on a nontaxable exchange as taking the place of any particular stock exchanged, and the cost of all the stock exchanged is to be the basis of all the stock received.
Although an exchange of stock for stock in the sam corporation made in 1923 would appear to have been a taxable transaction under the Revenue Act of 1921, as amended, the respondent did not treat it as such, presumably under T.B.R. 39 referred to above. Congress approved this ruling by incorporating it in all subsequent acts. This being the case, the exchange was a nontaxable exchange, and under the provisions of section 202(d)(1) the basis of the shares received on such an exchange is the cost of the shares exchanged. Both the exchange in 1923 and*1159 the exchange in 1928 of stock for stock in the *161 same corporation call for the same rule with respect to the basis of the stock received. We hold, therefore, that under both the exchange in 1923 and the exchange in 1928 the cost of the stock exchanged should be averaged over the total shares received on the exchange.
In the instant case there is no dispute as to the number of shares sold, and none as to the price received for them. The only dispute is as to the cost basis to be used in determining the profit. That basis should be computed in accordance with the views hereinabove expressed and the deficiency computed accordingly.
Decision will be entered under Rule 50.