*2416 GAIN OR LOSS. - Petitioner in the taxable year was lessee of certain coal properties and owner of all the issued stock of a corporation obligated by contract to purchase these properties, and had personally guaranteed the performance of the contract by the corporation and had advanced large sums to meet purchase payments and operating expenses. The balance of the purchase price soon falling due, petitioner sought a refinancing through bond issue and effected an arrangement with certain bankers, who agreed, for a fee of $125,000, to underwrite an issue of $1,250,000 mortgage bonds of the corporation, if unencumbered title to the properties were obtained by the corporation by purchase of petitioner's lease for $125,000, his equities in the property representing advances made by him for the balance of its authorized unissued capital stock, and the payment of the balance due under the contract for purchase of the property. To effect this arrangement, related and interdependent contracts were executed providing for the conveyance on these terms to the corporation of petitioner's interests, the issuance of stock and payment of $125,000 commissions by petitioner to the bankers and payment*2417 by the latter for the $1,250,000 bond issue. All of these contracts were carried out simultaneously at a meeting for this purpose, the corporation being vested with title to the properties, the bonds delivered to the bankers and the balance due under the purchase contract satisfied from the payment made therefor. The bankers retained $125,000 from the amount due for the bonds in satisfaction of the commission agreed to be paid them by petitioner, who receipted the corporation for the payment in the same amount due for the lease. At the conclusion of the transaction, petitioner held all of the stock of the corporation in place of the assets conveyed. Held, the constructive payment of $125,000 to petitioner by the corporation for the lease in question did not represent a realization by him of income in that amount, as all of the contracts in question were interdependent and in effect one transaction, of which such payment was merely an incident, petitioner being obligated upon receipt of that amount to pay over a similar amount to the bankers, and his gain or loss is determined by the result to him of the completed transaction.
*365 This proceeding results from the determination of a deficiency in income tax for 1921 in the amount of $43,390.07.
The petitioner alleges error in the disallowance by the respondent of a claimed deduction from income of a payment for services rendered by certain bankers.
FINDINGS OF FACT.
Petitioner is an individual residing in New York City. On May 1, 1918, he leased from Walter J. Grant, a large coal-mining property in the vicinity of Danville, Ill., for a term of four years from that date for a total rental of $1,600,000, payable in amounts of $33,333.33 per month.
On August 3, 1918, petitioner caused to be organized the Dominion Co., a Delaware corporation, only 20 shares of its common capital stock being issued, these being to nominees of petitioner in consideration of organization expenses borne by him.
On May 1, 1919, an agreement was entered into by the aforesaid Walter J. Grant and the Dominion Co., providing for the sale by the former to the latter of the coal properties covered by the aforementioned lease to the petitioner, *2419 such sale being made subject to the terms of the lease. Under this agreement the Dominion Co. obligated itself to pay a total purchase price of $1,016,790 in monthly installments of $16,666.67 until May 1, 1922, when the remaining balance of $416,790 would become due. A deed to the property was provided by the contract to be placed in escrow, for delivery upon completion of all payments required by the sale agreement.
The sale agreement was also made subject to and dependent upon the aforementioned lease to petitioner, it being provided that on failure to make either monthly payments for the property or the monthly rentals called for under the lease, the agreement would become null and void without recourse. It was further agreed by this sale agreement that a contract executed on the same date between the petitioner, the Dominion Co. and the Electric Coal Co., a corporation controlled by the aforesaid Walter J. Grant, was executed concurrently therewith and to be considered as an incident thereof. This latter agreement provided that the properties covered by the aforementioned lease and sale agreement should be operated by the Electric Coal Co., and that the proceeds of this*2420 operation, over and above operation funds of $240,000, should be applied upon the rentals called for under the lease and the payments called for under the agreement of sale. Also, as an incident of such agreement of sale, the petitioner, individually, guaranteed the performance by the Dominion Co. of its obligations under the agreement of sale and under the contract with the Electric Coal Co.
*366 Following the execution of these contracts the property was operated by the Electric Coal Co. The proceeds from such operations were not sufficient to meet the payments under the sale agreement and the lease, and petitioner was required to meet the deficiencies in such payments under his guarantee, expending from personal funds for the purpose by July 1, 1921, approximately $450,000. In addition, petitioner was called upon to make advances from time to time from personal funds to the operating company for equipment, additions, and betterments, amounting in excess of $300,000 by July 1, 1921.
Late in the year 1921, the general situation in the coal-mining business was bad and a serious coal strike was anticipated, which would cut off the income from this property. At that*2421 time it was evident that petitioner would be obligated to make payments in excess of $1,000,000 on or before May 1, 1922.
As of this date the situation was that petitioner was the owner of the lease of these properties, under which he had made considerable payments, and was the owner of all the issued capital stock of the corporation which held a contract for the purchase of the property, and had made large advances to such corporation to enable it to meet payments called for on the purchase price. Petitioner also had an equity in certain liquid assets of the Electric Coal Co. representing advances made that company for equipment and operating funds. As against these assets petitioner had a personal and individual liability under his guarantee of the obligation of the Dominion Co. and his personal obligation under the lease, and realizing that the situation was one calling for a refinancing by consolidation of the assets and liabilities in the Dominion Co. and his release from personal liabilities, he made various attempts to secure this result through agreements with Walter J. Grant for a substitution of a first mortgage on the properties for the individual and corporate liabilities*2422 to the latter as they then existed. These efforts were unsuccessful, as were efforts to secure financing through certain bankers, until finally petitioner negotiated an arrangement with Hemphill, Noyes & Co., a banking firm of New York City, having as its purpose the creation of a basis in the Dominion Co., the name of which had been recently changed to the United Electric Coal Co., for the securing of a loan to that company sufficient in amount to pay off the total indebtedness under the aforementioned lease and agreement of sale. In order to do this it was necessary to secure to the corporation unencumbered title to the coal property and to the assets represented by the lease and the equity in assets of the operating company, then belonging to petitioner.
In order to effect this result and to complete the loan in question, the following two agreements were executed on July 1, 1921: (a) An *367 agreement between petitioner and Hemphill, Noyes & Co. providing for the underwriting by the latter of an issue of $1,250,000 first mortgage bonds of the United Electric Coal Co. and the payment of the sum of $125,000 as compensation for the services rendered the petitioner by Hemphill, *2423 Noyes & Co. in the examination of the properties, as called for in a contract known as the "Bankers' Contract" to be executed thereafter, and the reorganization of the corporation and the refinancing thereof. (b) A contract between the United Electric Coal Co. (formerly the Dominion Co.) and Hemphill, Noyes & Co., being the contract referred to in the foregoing agreement as the "Bankers' Contract," providing in detail a proposed scheme for reorganization of the United Electric Coal Co., under which the latter agreed (1) to increase its capital stock, which then consisted of 15,000 shares of stock of no par value, of which only 20 shares were issued and outstanding, by causing to be authorized in addition $250,000 par value 6 per cent cumulative preferred stock; (2) to acquire all of the coal properties and equipment, additions and betterments free and clear of all liens and encumbrances of any description, together with the net quick assets shown on the balance sheet of the Electric Coal Co. of April 30, 1921, the latter to have a value of at least $300,000.
It was further agreed by this contract that for the properties and assets aforesaid the corporation would issue 14,980 shares*2424 of its common no par value stock and the $250,000 par value preferred stock agreed to be authorized and use such amount of the cash proceeds of its proposed bond issue of $1,250,000 as might be necessary to acquire for the corporation the title to this property free of all indebtedness other than the mortgage bonds and current liabilities acquired in connection with the purchase of the assets of the Electric Coal Co. It further provided that immediately upon the acquisition of these properties as above set out, the corporation should execute and issue the $1,250,000 of first mortgage bonds, and Hemphill, Noyes & Co. agreed to accept and make payment for these on the basis of 88 per cent of the principal amount thereof together with accrued interest, if their investigation of the title and the values of the coal properties showed the basis for the loan to be in their opinion, acceptable.
Upon execution of these contracts petitioner and the United Electric Coal Co. at once proceeded to prepare the necessary contracts to effect the result called for under these two agreements. On July 29, 1921, a written proposal was submitted by petitioner to the United Electric Coal Co. to convey*2425 to it in exchange for 14,980 shares of its no par value common stock, the additions, betterments, and other personal property on the coal lands in question, for which *368 he had paid from personal funds, together with certain additional property in the way of mineral lands acquired by him with personal funds as incident to the operation of these properties, and to release the corporation from all claims which he held against them and representing $450,000 paid by him from personal funds to Walter J. Grant on account of the purchase price of the coal property by the corporation. He further offered in consideration of the issuance to him of $250,000 par value preferred stock to transfer and convey to the corporation all of the quick or current assets arising from the operation of the properties by the Electric Coal Co., consisting of accounts receivable and cash in banks and on hand. He further offered in consideration of the payment to him of the sum of $125,000 in cash to assign and transfer the lease to the property which he held.
This proposal was accepted by the United Electric Coal Co., the necessary minute entries were made, and the conveyances drawn to carry these*2426 transfers into effect and upon this being done a meeting was held by petitioner and his attorneys, representing himself and the United Electric Coal Co., with the representatives of Hemphill, Noyes & Co. and representatives of the owners of the coal properties, and the entire transaction was effected at such meeting by the delivery of the conveyances, the issuance of the stock, delivery of bonds, and payment of the monies called for under the various agreements. The payment of the item of $125,000 to Hemphill, Noyes & Co. was effected by that company retaining such sum from the total due the corporation for the $1,250,000 bond issue at 88 per cent of its face value, the balance being paid over to the corporation.
Petitioner, in his income-tax return for the calendar year 1921, reported as income the amount of $125,000 as received by him for the assignment of his leasehold interest and claimed as a deduction from total gross income $125,000 as compensation paid by him to Hemphill, Noyes & Co. Respondent, in determining the deficiency here in question, included in income $125,000 as representing the sale price of the lease, but disallowed the deduction of $125,000 representing the*2427 commission paid Hemphill, Noyes & Co.
OPINION.
TRUSSELL: The facts herein found are not in controversy. The issue is whether the petitioner derived taxable gain during the year 1921 from the transactions set forth in the findings of fact.
When all of the agreements necessary to the plan of the reorganization of petitioner's business had been made, representatives of all the parties met and carried out and executed the agreements as set forth herein. At the conclusion of these transactions the United *369 Electric Coal Co. held all the assets formerly belonging to the petitioner, together with $1,100,000 paid for the bond issue, less the amount of $125,000 commission retained by the bankers, and less the amount paid to Walter J. Grant for title to the coal properties thus acquired by the corporation. The bankers held the issued $1,250,000 of bonds and $125,000 in cash. The petitioner held all the common and all the preferred stock of the United Electric Coal Co. He had transferred to that company all of the several properties previously owned by him and he received and thereafter held the beneficial ownership and the control of the corporation.
Upon consideration*2428 of all the facts it is clearly shown that the several transactions among petitioner, the corporation, and the bankers, were related and interdependent. That such was the case is conceded by the respondent. They were merely steps taken to arrive at a reorganization and a refinancing of the corporation which would secure the property to the latter upon a basis of long deferred payment and permit it to be held and operated without acute danger of loss of the investment, this condition being further aided and strengthened by a liquidation of the corporation's very large indebtedness to petitioner by issue of common stock and its acquisition of some $300,000 of additional liquid assets for a preferred stock issue of $250,000. This refinancing had the effect also of relieving the petitioner of his individual liabilities under the lease and his guarantee of the contract of purchase. In this connection, it must be kept in mind that, in so far as these transactions between petitioner and the corporation are concerned, although they are between distinct and separate entitles, there was only one interest involved, all of the stock of the corporation being owned by petitioner, and its acts*2429 being entirely subject to his dictation.
Respondent insists that the obligation to pay $125,000 to the bankers was not a corporate obligation but one of petitioner individually, and that the ultimate consideration for this payment was represented by the issue to petitioner of additional stock. Petitioner admits that the obligation was personal, but contends that the consideration was represented by the release secured by him from individual liability under his aforementioned guarantee.
After careful consideration of the record, we find it impossible to conclude that the consideration for the payment of the bankers' commission was wholly personal to petitioner in the release of liability under the guarantee. It is true that the refinancing of the matter upon the basis agreed upon had this effect, and it is evident that the fact that it would so result was one of the inducing causes for the action taken, but the payment of the commission was something required by the bankers for their extension of credit to the corporation; *370 its payment was necessary to secure to the latter ultimate title to the property and the refinancing of its affairs, and it is quite evident that*2430 this refinancing was in the interest of the corporation as well as of petitioner.
The ultimate question is the net gain, if any, to petitioner from the series of related and interdependent transactions. In determining this, must we, as both parties to the proceeding have done, consider the several transactions as separate and distinct, each giving rise to possible gain or loss, or consider them as one transaction and measure petitioner's gain or loss by the ultimate result to him by their performance? Where a general purpose is carried out by a series of separate contracts such as those here involved, all interdependent and all intended to effect a definite result understood and agreed upon before any one of the several obligations is assumed, the realization of taxable income by one of the individual parties is determined by the result to him of the several transactions. Cf. ; ; .
In the case before us, petitioner agreed to transfer the lease to the corporation for $125,000 cash, and at the same time agreed to pay*2431 a similar amount to the bankers for their undertaking to do those things which made possible the acquisition by the corporation of the lease and other assets. His agreement to pay this amount to the bankers was but an incident of the transaction under which it was agreed that he would receive $125,000 in cash and certain stock from the corporation in return for his assets, and it must be admitted that, as a result of the simultaneous transfers, petitioner held in the place of the assets formerly belonging to him 14,980 shares of common stock and $250,000 of preferred stock of the corporation - before any of the separate transactions were agreed upon or carried out it was definitely determined and fixed that this would be, as to him, its ultimate effect.
The $125,000 claimed to have been constructively received by petitioner in this transaction can not be held to represent income realized by him when an obligation created as an incident of the same transaction required that he simultaneously surrender it. Such an item does not meet the definition of income in *2432 , as "not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital however invested or employed, and coming in, being 'derived,' that is received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal."
We hold that as to this taxpayer these several related transactions were in effect one transaction and the methods used or forms adopted *371 to effect the result agreed upon were not material, the taxability of this petitioner being determined not by the form, but by the result. Cf. ; ; ; . No amount should have been included in petitioner's return for the year 1921 as a gain from the sale of the lease or as a deduction for commissions paid the bankers. *2433 The amounts in question are merely factors in the determination of the gain or loss sustained by him as a result of the transaction.
Reviewed by the Board.
Judgment will be entered pursuant to Rule 50.
MARQUETTE, SMITH, STERNHAGEN, PHILLIPS, and BLACK concur in the result only.