1935 BTA LEXIS 826">*826 1. Section 203(b)(4) of the Revenue Act of 1924 is not applicable to a transfer of property to a corporation by two groups of persons solely in exchange for its entire capital stock, where it appears that the members of one group contributed property of greater value than that contributed by the members of the other group and the stock was issued to all members of both groups in equal proportions.
2. The value of stock issued in exchange for assets may be measured by the value of the assets received, where the corporation had no assets and no outstanding stock or liabilities prior to the exchange.
32 B.T.A. 1270">*1270 The Commissioner determined a deficiency of $28,228.50 in the petitioner's income tax for 1924. The only issue in the case is whether the Commissioner should have used cost to the petitioner as the basis for gain and loss on certain leases which the petitioner sold during the year 1924.
FINDINGS OF FACT.
A group of five persons (hereinafter called the Chisholm group) acquired certain leases at a total cost of $70,000 or more. R. J. Wallace1935 BTA LEXIS 826">*827 and George Ryburn had also acquired certain leases at a 32 B.T.A. 1270">*1271 cost not shown. These two groups organized the petitioner corporation in June 1923 under the laws of Montana, for the purpose of taking over the leases of the two groups. The seven men transferred their interests in the leases to the petitioner solely in exchange for a part of its stock. The total authorized stock consisted of 5,000 shares, each share having a par value of $100. Five hundred and fifty shares were issued to each of the seven men. Twenty-five shares were issued to an eighth man for an automobile and some other small consideration. The remaining shares were not issued at that time. The total fair market value of the property transferred to the petitioner by the seven incorporators was $386,500. The cost of the property to the petitioner was $386,500.
The five men in the Chisholm group owned equal interests in the property transferred by that group to the corporation. The value of the property transferred by each member of this group was substantially greater than the value of the property transferred by either Wallace or Ryburn. Immediately after the transfer the seven men were in control1935 BTA LEXIS 826">*828 of the petitioner. The amount of stock received by each was not substantially in proportion to his interest in the property prior to the exchange.
The petitioner sold certain of the leases and a one-half interest in the remaining leases in 1924. The total amount realized from these sales was $268,350. The basis for gain or loss on the portions of the property sold was $223,828. The gain realized by the petitioner was $44,522.
The Commissioner in determining the deficiency disallowed the use of the basis of $223,828 and failed to use any basis.
OPINION.
MURDOCK: The Commissioner has proceeded upon the erroneous theory that the petitioner's basis for gain or loss upon the sale of the properties involved herein is fixed by section 204(a)(8) of the Revenue Act of 1924 at the same basis which the properties had in the hands of the transferors. That section only applies where property is acquired in connection with a transaction described in section 203(b)(4). One of the requirements of the latter provision is that immediately after the exchange the transferors must be in control of the corporation and each must have received an amount of stock substantially in proportion1935 BTA LEXIS 826">*829 to his interest in the property prior to the exchange. Here the latter requirement was not met. The Chisholm group, in order to induce Wallace to come in with them and thus assure themselves that later his greater experience would help the corporation, agreed, after much discussion, to give him and his associate Ryburn equal interests with each of the members 32 B.T.A. 1270">*1272 of the Chisholm group. This was done despite the fact that the properties transferred to the corporation by Wallace and by Ryburn were much less valuable than the properties transferred by each member of the Chisholm group. Each took an interest in the corporation of 14.2 percent. Wallace's interest in the properties was only 5.55 percent while that of each member of the Chisholm group was 17.72 percent. Consequently, the exception provided in section 203(b)(4) does not apply, nor does the exception provided in section 204(a)(8). Cf. . There is no contention that any other exception of section 204(a) applies. Therefore the general rule of (a) applies and the petitioner's basis is cost.
There is no dispute as to the cost. 1935 BTA LEXIS 826">*830 The corporation had no assets prior to the exchange. It paid for the properties in its stock. The cost of the properties was the value of the stock. The value of the stock is here measured by the stipulated value of the assets of the corporation. .
Decision will be entered under Rule 50.