*1377 GAIN OR LOSS ON EXCHANGE. Petitioner exchanged with the Fishback Company certain real estate and cash for all the common stock of the Fishback Realty Company. At about the same time it acquired a leasehold then held by the Fishback Company as lessee of the "Fishback property" which was the sole asset of the Fishback Realty Company. Held, (1) the leasehold was not included with the common stock of the Fishback Realty Company as part of the deal in which petitioner acquired said common stock; (2) the leasehold here involved had no fair market value.
*48 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1925 in the amount of $5,641.45. The amount of tax in controversy is $2,480.50.
The sole issue is whether petitioner sustained a loss upon the exchange of certain real estate and cash for common stock in a domestic corporation.
FINDINGS OF FACT.
Petitioner is an Indiana corporation, with its principal office at the Union Stock Yards in Indianapolis.
On December 17, 1925, petitioner*1378 and the Fishback Company (also an Indiana corporation) consummated an exchange of properties. The net depreciated cost of the properties given in exchange by petitioner was $54,780.77, itemized as follows:
| Kind of property exchanged | Date acquired | Cost |
| Ries real estate | Dec. 21, 1919 | $13,041.02 |
| Durban real estate | Mar. 25, 1924 | 9,000.00 |
| Brewing Company real estate | Dec. 8, 1925 | 19,000.00 |
| Cash | 14,000.00 | |
| Total | 55,041.02 | |
| Less: Depreciation Ries real estate | 260.25 | |
| Net depreciated cost of properties exchanged | 54,780.77 |
Petitioner received in exchange from the Fishback Company all the common stock of the Fishback Realty Company, whose sole asset was the Fishback property, hereafter described.
The Fishback property was a piece of unimproved real estate (200 by 185 feet) on the west side of Delaware Street, between *49 South Street and the Union Railway tracks in Indianapolis. The Fishback property, standing by itself, was so situated that it was economically impossible to build a switch on it without crossing the property directly adjoining it on the north and south, which adjoining property was owned by petitioner. So-called "switch*1379 property" was worth twice as much as "non-switch property."
Prior to the incorporation of the Fishback Realty Company in 1922, the Fishback property was owned by the Fishback Company. In 1922 the Fishback Company organized the Fishback Realty Company and transferred the Fishback property to the newly organized corporation in exchange for all the latter's common capital stock of the par value of $100,000. Thereafter, in 1922, the Fishback Realty Company issued to the public, for cash, preferred stock of the par value of $105,000. The preferred stock certificate carried a provision for cumulative annual dividends at the rate of 6 1/2 per cent, payable quarterly, and for the retirement thereof on a specific date. In case of default in performance of these provisions, the certificate further provided that the affairs of the Fishback Realty Company may be wound up by receivership or otherwise and its assets reduced to cash.
At the time of the incorporation of the Fishback Realty Company the Fishback Company entered into a ten-year lease with the newly organized corporation, in which it leased from that corporation the Fishback property, and, in consideration for the lease, the*1380 Fishback Company agreed to pay as rental (1) sufficient money to pay the dividends and to make the redemptions on the preferred stock, (2) all taxes and assessments against the Fishback property, (3) any income, excise, capital-stock, or other taxes and assessments that might be imposed upon the Fishback Realty Company as lessor, and (4) all other expenses of the lessor, including insurance and repairs.
On December 12, 1925, the board of directors of the Fishback Company met and adopted a resolution authorizing its president to sell, exchange or otherwise dispose of all the common capital stock of the Fishback Realty Company then owned by the Fishback Company, and at the same time, but in another resolution, authorized the president to sell and assign its rights, title and interest as lessee under the above-mentioned lease with the Fishback Realty Company.
On December 14, 1925, petitioner and the Fishback Company entered into an agreement, called "Assignment of Lease," in which the Fishback Company thereby sold, assigned and transferred unto the petitioner all the rights, title and interest owned or possessed by the Fishback Company under the lease it had with the Fishback Realty*1381 Company, in consideration for petitioner assuming all the obligations of the Fishback Company as lessee under the lease.
On December 17, 1925, the amount of preferred stock of the Fishback Realty Company then outstanding and unredeemed was $73,500. *50 During the year 1926 petitioner redeemed and paid off all the outstanding preferred stock of the Fishback Realty Company. Up to December 17, 1925, the Fishback Company had had no offers of any kind for the purchase of the common stock of the Fishback Realty Company.
The fishback property was assessed by the assessor of Marion County, Indiana, in which county the real estate was located, as of March 1, 1922, at $101,000. The fair market value of the Fishback back property on December 17, 1925, was $109,200. The fair market value of the common capital stock of the Fishback Realty Company on December 17, 1925, was $35,700.
The leasehold here involved, as an asset, in and of itself had no fair market value.
Petitioner deducted on its income-tax return for the calendar year 1925, as a loss from the exchange of property, the difference between the amounts of $54,780.77 and $35,700, or $19,080.77. The respondent disallowed*1382 the deduction and in a statement attached to the deficiency notice as an explanation thereof, said: "The alleged loss claimed through the exchange of property cannot be allowed for the reason that the values claimed for the property received in the exchange have not been substantiated."
OPINION.
LOVE: As previously stated, the only issue involved in this proceeding is whether petitioner sustained a loss upon the exchange of three pieces of real estate acquired after March 1, 1913, having a net depreciated cost of $40,780.77, and $14,000 in cash for all the common stock of the Fishback Realty Company.
Section 202(a) of the Revenue Act of 1926, provides:
Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized. [Italics supplied.]
The basis provided in subdivision (a) of section 204, as diminished by the deductions provided for in section 202(b)(2), is the amount of $54,780.77, upon which the parties hereto are agreed.
*1383 Section 202(c) provides:
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. [Italics supplied.]
The question thus narrows itself to what the "fair market value" of the common stock of the Fishback Realty Company was on December 17, 1925, within the meaning of that term as used in section 202(c), supra.
*51 With respect to the fair market value of the stock, there were no sales either prior or subsequent to December 17, 1925, the date in question. Neither were there any offers therefor. Under such circumstances, the rule most generally applied is to determine the fair market value of the assets behind the stock. The only asset owned by the Fishback Realty Company was the Fishback property. As far as the fair market value of the stock is concerned, the question is, therefore, finally narrowed to the determination of the fair market value of the Fishback property on December 17, 1925. In this connection, we are satisfied from the testimony of three well qualified and experienced real estate men, who had been engaged in*1384 the real estate business in Indianapolis for from 30 to 47 years, that the fair market value of the Fishback property on December 17, 1925, was $109,200, allocated $73,500 to the preferred stock, and $35,700 to the common stock. We, therefore, find that the fair market value of the common stock of the Fishback Realty Company received by petitioner on December 17, 1925, was $35,700.
At and before the date of acquisition by petitioner of the common stock of the Fishback Realty Company, petitioner owned the property north of the Fishback property and also the property south of said property. The property in that vicinity, being alongside the railroad tracks, was suitable only for warehouse purposes, and was designated locally as switch property. The Fishback property, alone, was too small to permit a switch being constructed on it, and, hence, not very desirable property. Used in connection with petitioner's properties, it is desirable switch property. In view of the situation and the history involved in the transactions here being considered, we believe that all the parties concerned had in mind at all stages of such transactions the acquisition by petitioner of the Fishback*1385 property, the liquidation of the Fishback Realty Company corporation, and the cancellation of the leasehold.
However, the acquisition of the leasehold was by an assignment dated December 14, 1925, and the consideration named therein was the assumption on the part of petitioner of all the obligations named in the lease contract and theretofore carried by the original lessee. The assignment of the common stock in question was evidenced by a document dated December 17, 1925, and the consideration named therein was the properties listed in our findings of fact. The leasehold in question did not form a part of such consideration.
In view of the fact that the net worth of the Fishback property on December 17, 1925, after deducting the amount of outstanding preferred stock, was $35,700, we have found that amount to be the fair market value of the common stock, and since that common stock was acquired in exchange for property whose depreciated cost was *52 $54,780.77, it follows that petitioner suffered a loss of the difference, that is, $19,080.77.
We will now consider, briefly, petitioner's alternative proposition which in effect is that, if it be held that the acquisition*1386 by petitioner of the common stock and the acquisition of the leasehold constituted one and the same transaction, the leasehold had no fair market value, and, hence, was nil in the transaction, in which situation the result is the same.
Under the terms and conditions of the lease contract, from the lessor's standpoint, there was no net income, for the reason that all the rentals were dedicated to the payment of the current obligations of the lessor, whose asset was the property here involved, and were limited to the amount thereof. There could be no net income from the leasehold to the lessor. By net income we do not mean no taxable income, but mean no income in excess of correlated obligations.
From the standpoint of the lessee, the leasehold had no value, for the reason that the annual rentals far exceeded the actual rental value of the premises. From the lessee's standpoint, it was a liability rather than an asset.
At the rehearing, petitioner submitted the testimony of William T. Rasmussen, who has been in the real estate business in the city of Indianapolis, Indiana, for more more than thirty years, and thoroughly qualified as an expert witness on the subject of leasehold*1387 valuations in that city. The substance of his testimony was that the leasehold in question, under the circumstances and conditions involved, had no value whatever. Hence, even if the leasehold were held to have been included in the deal, as it had no value, it follows that what the petitioner received in the exchange was worth $19,080.77 less than the depreciated cost of the property it gave, and that, therefore, it suffered a loss in that amount.
In view of the fact that the issue involved in this proceeding does not account for the total amount of the deficiency determined for the year 1925,
Judgment will be entered under Rule 50.