*1847 1. Where the petitioner voluntarily changes its accounting period from a calendar year basis to a fiscal year basis ending November 30, held, that a statutory net loss incurred in the eleven-month period ending November 30, 1922, may not be carried forward to that part of the fiscal year ending November 30, 1924, which fell in 1923 and which is taxable under the Revenue Act of 1921. Dorsey Drug Co.,7 B.T.A. 229">7 B.T.A. 229; Strain Bros., Inc.,19 B.T.A. 601">19 B.T.A. 601, followed.
2. Where petitioner sold its crude oil to another corporation at a price payable part in cash and part in the fully paid and nonassessable stock of such other corporation, the fair market value of such stock at the time it is received in payment should be included as a part of petitioner's gross income in the years when received.
3. Where petitioner transferred 250,000 shares of stock, of a par value of $1 per share, which it owned in another corporation, to such other corporation in consideration of its assuming and agreeing to pay $220,055.85 of indebtedness, which petitioner owed, and where petitioner has been released from the payment of such indebtedness, such transaction is*1848 one in which gain or loss is recognized and such gain or loss will be determined by using as a basis the cost of the stock to petitioner which was transferred.
*610 In this proceeding petitioner seeks a redetermination of its incometax liability for the fiscal year ended November 30, 1924, the fiscal year ended November 30, 1925, and the calendar year 1926, for which periods the respondent has determined deficiencies of $128.72, $4,518.43 and $28,563.24, respectively.
The petitioner alleges that the respondent erred:
(1) In failing to carry forward a statutory net loss for the eleven-month period ended November 30, 1922, to the fiscal year ended November 30, 1924.
(2) That for all the years involved the respondent included in income the value at par of the capital stock of the Sunburst Refining *611 Company received by the petitioner as a premium in connection with a certain contract for sale of crude oil between the petitioner and the Sunburst Refining Company, whereas*1849 said stock should only have been included at 25 per cent of its par value.
(3) That for the calendar year 1926 the respondent increased the profit by $179,305.13, resulting from the exchange by the petitioner of 250,000 shares of Sunburst Oil and Refining Company stock to the last named corporation in return for its agreeing and assuming to pay petitioner's liabilities in the amount of $220,055.85. Petitioner claims that $1,518.22, included in its return for the taxable year, correctly represents the profit on this transaction.
FINDINGS OF FACT.
The petitioner is a Montana corporation, originally chartered under the name of the Automobile Credit Company, with its principal place of business at Great Falls, Mont. Prior to January 1, 1922, the petitioner filed its income-tax returns on a calendar year basis. On January 1, 1922, with the approval of the Commissioner of Internal Revenue, it changed to a fiscal year basis ended November 30, and thereafter the returns were filed for the following periods:
January 1, 1922 to November 30, 1922.
December 1, 1922 to November 30, 1923.
December 1, 1923 to November 30, 1924.
December 1, 1924 to November 30, 1925.
December 1, 1925 to*1850 December 31, 1925.
January 1, 1926 to December 31, 1926.
During the eleven-month period ended November 30, 1922, the petitioner suffered a statutory net loss, and petitioner and respondent are in agreement as to the amount of this statutory net loss. For the fiscal year ended November 30, 1923, the respondent determined that after the application of $50,659.75 nontaxable dividends against the net loss of $30,090.97, there remained no net loss to be carried forward for this fiscal year. For the fiscal year ended November 30, 1924, the respondent found a net income of $14,357.10. In computing the tax for the fiscal year ended November 30, 1924, the respondent refused to apply the net loss from the eleven months in 1922 against that portion of the income in 1924 which was governed by the Revenue Act of 1921, that is, for the month of December, 1923. The respondent treated this statutory net loss for the eleven months January 1 to November 30, 1922, in the following manner:
| 1924 | |
| Net income as corrected | $14,357.10 |
| Less: Exemption | 2,000.00 |
| Balance subject to tax | 12,357.10 |
*612 Where there has been a change in the accounting period a statutory net*1851 loss for a fractional part of a year can not be applied under Section 204 of the Revenue Act of 1921 against the net income of a subsequent taxable year. In the computation of the tax under the 1921 Act the net loss for the eleven months period in 1922 is therefore not brought forward.
| Income tax at 1921 rates - 12 1/2% | $1,544.64 |
| 1/12 of tax at 1921 rates | 128.72 |
| Total tax | 128.72 |
| Previously assessed | None. |
| Additional to be assessed | 128.72 |
Inasmuch as the net loss for the period ended November 30, 1922, is in excess of the net income for the taxable year there is no tax liability under the Revenue Act of 1924.
On February 15, 1924, the petitioner, who was then engaged in the handling of crude oil in the Kevin-Sunburst Oil field in Montana, entered into a written contract with the Sunburst Refining Company, which was then engaged in the refining of crude oil, to sell its crude oil for refining purposes. The contract called for the delivery by the petitioner of certain quantities of crude oil over a period of nine years. The contract contains the following provisions:
1. The party of the first part has agreed and does hereby agree to secure for and sell*1852 to said party of the second part, and said party of the second part has agreed and does hereby agree to purchase for nine years from and after the date hereof, three thousand barrels of crude oil per day, delivered F.O.B. cars of said second party at loading point designated by said party of the first part, nearest field where produced, but such loading point to be within the north central portion of Montana, such oil to be "paraffine" base testing not less than 28 degrees Baume, the price to be the bona fide tank car price for oil free on board cars at Sunburst, Montana, or other tank farm storage locations, alongside railroad loading tracks, plus ten cents per barrel premium over said free on board cars spot price which other leading companies purchasing oil in such fields for resale quote oil in lot deliveries for immediate shipment.
* * *
3. Payment for the oil sold and delivered hereunder shall be made by said second party to said first party weekly each Monday, for the amount of oil delivered during the preceding week, except the premium of ten cents per barrel agreed to be paid, such premium of ten cents per barrel to be paid by said party of the second part hereto to*1853 said party of the first part in the manner following, to-wit: for the first 5,000,000 barrels of oil sold and delivered hereunder, or so much thereof as may be delivered, the said party of the second part, in lieu of paying the same with money, will issue to the said party of the first part its fully paid, non-assessable capital stock, with a par value of an amount equal to the premium of ten cents per barrel upon said 5,000,000 barrels of oil, to-wit: $500,000.00 payment in stock for such premium to be made monthly, on or before the 10th day of each month, by issuance and delivery of the amount of shares of capital stock to said first party, required to pay the premium upon the total amount of oil delivered during the previous *613 calendar month, and when the total of said premium of ten cents per barrel shall have amounted to $500,000.00, thereafter the same shall be paid, in lawful money of the United States, on the 10th day of each month for the oil sold and delivered hereunder during the preceding month.
Deliveries were made under the terms of this contract until the month of December, 1927, when it was canceled by agreement of the parties. Petitioner received the*1854 following amounts of stock from the Sunburst Refining Company in part payment of crude oil delivered under this contract:
| Shares | |
| 1924 | 26,487 |
| 1925 | 37,545 |
| Dec. 1 to 31, 1925 | 4,746 |
| 1926 | 56,768 |
During the period when the petitioner was receiving the stock of the Refining Company as a premium on its crude oil, the cash premium being paid in the field by other purchasers of crude oil was never less than 10 cents per barrel and at times ran as high as 35 cents per barrel.
From 1923 to 1925 the Sunburst Refining Company was embarrassed by various financial difficulties. Its losses for the years 1923, 1924 and 1925 were $3,142.61, $20,874.89 and $42,235.17, respectively, and it was not until 1926 that it showed a profit. In 1924 liens were filed against the property in the amount of $158,800 and suit was started for the foreclosure of these liens, and the State of Montana during this period was prosecuting actions for the recovery of over $70,000 alleged to be due the State for taxes. The law under which this tax was created was later held to be unconstitutional. There was never an open market for the sale of the Refining Company stock. However, during the*1855 period under consideration some 140,000 shares of its stock were sold by solicitation on subscription at par, $1 per share. Smaller amounts were sold by brokers at 50 cents a share and there were a few sales at as high as 80 cents a share made by brokers, and from these prices the broker deducted a fee of 10 cents on each share as his commission for selling.
In the latter part of 1925 the financial situation of the Sunburst Refining Company materially improved. The foreclosure suit brought against it by creditors had been settled by agreement, permission being granted to the corporation to pay the claims held against it on installment basis. The claims held by the State of Montana against the corporation for unpaid taxes had been declared void by the courts. In 1926 the corporation made a profit of $163,264.56. This was the first year it had conducted its operations profitably.
*614 The petitioner carried the stock received as a premium on crude oil sales for all of the taxable years on its books at 25 per cent of their par value or 25 cents a share. The respondent has determined the value of these shares to be par, or $1 per share. From all the evidence we find*1856 that the stock of the Sunbrust Refining Company which petitioner received in the taxable years had a fair market value as follows:
1924, of 50 cents per share.
1925, of 60 cents per share.
1926, of $1 per share.
In 1925 the name of Sunburst Refining Company was changed to Sunbrust Oil and Refining Company.
During the calendar year 1926 the petitioner conveyed to the Sunburst Oil and Refining Company, out of an aggregate of 1,262,879 shares, 250,000 shares of that company's stock in return for that company assuming and agreeing to pay liabilities of the petitioner in the amount of $220,055.85. In reporting the gain in this transaction the petitioner computed a profit of $1,518.22, while the respondent in his determination has computed the profit to be $180,823.35, and determined the deficiency accordingly. This deficiency arises from the disparity in cost placed upon the stock in question by petitioner and that determined by the Commissioner. The Commissioner determined the cost of the stock to petitioner to be $0.16493 per share, while petitioner contends that the proper cost is $0.88215 per share.
The cost to petitioner of the 250,000 shares of stock in the Sunburst*1857 Oil and Refining Company, which in 1926 it transferred to said corporation in consideration of its agreement to assume and pay $222,055.85 of petitioner's liabilities was $0.834 per share.
OPINION.
BLACK: The first error which petitioner assigns in its appeal is the refusal of the respondent to allow as a deduction in computing net income for the fiscal year ended November 30, 1924, the entire statutory net loss incurred in the eleven-month period ended November 30, 1922, there being no taxable income for the fiscal year ended November 30, 1923.
The method which respondent used in handling petitioner's statutory net loss for the eleven-month period beginning January 1, 1922, and ending November 30, 1922, has been fully detailed in our findings of fact. This method followed prior decisions of the Board and is therefore approved. ; .
*615 The next issue raised by the petitioner is altogether one of fact and regards the fair market value of certain shares of stock in Sunburst Refining Company which petitioner received in each of the taxable years in part payment of crude*1858 oil which it sold to Sunburst Refining Company during such years.
Both petitioner and respondent are agreed that the fair market value of this stock at the time it was received was a part of petitioner's gross income in each of the taxable years. The only disagreement is as to what that fair market value was. In our findings of fact we have found what such fair market value was in each of the taxable years and in determining the deficiencies for each of the taxable years This fair market value should be used.
The next and last issue raised by petitioner in its appeal is also one of fact and is as to the cost of 250,000 shares of stock of the Sunburst Oil and Refining Company which in 1926 petitioner transferred to said Sunburst Oil and Refining Company in consideration of its assuming and agreeing to pay $220,055.85 liabilities which were then owing by petitioner. Both petitioner and respondent are in agreement that this exchange of stock for assumption and agreement to pay liabilities was a taxable transaction. Both treat it as a transaction in which the petitioner received a complete acquittance from its creditors of $200,055.85 indebtedness and by which thereafter the*1859 Sunburst Oil and Refining Company became substituted as a debtor to the creditors for $220,055.85 instead of petitioner. In this state of facts, petitioner's acquittance of $220,055.85 of its indebtedness to creditors became to it the same as cash received in that amount for the 250,000 shares of stock which it transferred to the Sunburst Oil and Refining Company.
The only disagreement between petitioner and respondent as to this transaction is as to the cost to petitioner of the stock transferred. We have found in our findings of fact the cost of petitioner of each share of this 250,000 shares of stock transferred and in redetermining the deficiency for 1926 this cost per share should be used by the respondent as a basis.
Decision will be entered under Rule 50.