*784 The above entitled proceedings, which were consolidated for hearing and decision, were initiated for the redetermination of deficiencies in income taxes for the years 1922 and 1923, as follows:
| 1922 | 1923 | |
| Gladys Bilicke | $47,825.55 | $973.22 |
| Nancy De Roulet | 20,911.72 | 154.51 |
| Gladys Bilicke, guardian for Carl A. Bilicke | 20,989.86 | 204.35 |
| Gladys Bilicke, Guardian for A. Constant Bilicke | 20,989.86 | 189.35 |
The petitioners allege that the respondent erred:
(1) In refusing to allow each of the petitioners to deduct from income for the year 1922 a prorated share of the total sum of $8,523.50 paid by the estate of A. C. Bilicke, deceased, as attorney fees for special or extraordinary legal services;
(2) In holding that the transfer of the assets received by petitioners from the estate of A. C. Bilicke to a corporation was a sale for cash on which a profit was realized;
(3) In using the value of the assets of the estate at the time of the death of the decedent as the basis for determining profit;
(4) In his interpretation of*2033 section 202(c) of the Revenue Act of 1921.
The petitioners also allege that section 202 of the Revenue Act of 1921, if correctly interpreted by the respondent, is unconstitutional.
FINDINGS OF FACT.
A. C. Bilicke died on or about May 7, 1915, leaving him surviving his wife, Gladys Bilicke, and three minor children, Nancy C. Bilicke, A. Constant Bilicke and Carl A. Bilicke. Gladys Bilicke, the decedent's *785 widow, and one A. B. C. Dohrman of San Francisco, Calif., were thereafter duly appointed by the Superior Court of Los Angeles County, Calif., as executors of the decedent's estate, and Mrs. Bilicke was appointed guardian of the estates of the children. The minor children and Gladys Bilicke were the sole beneficiaries of the estate of A. C. Bilicke, their respective interests being as follows:
| Mrs. Gladys Bilicke | 1/3 |
| Nancy C. Bilicke (now Mrs. Nancy De Roulet) | 2/9 |
| Carl A. Bilicke | 2/9 |
| A. Constant Bilicke | 2/9 |
The net estate, consisting of personalty and realty, was of the value of more than $2,000,000.
In 1921 the Fifth and Broadway Investment Co. was incorporated under the laws of the State of California, with a capital stock consisting*2034 of 10,000 shares of the par value of $100 each, thereafter increased to 30,000 shares. The incorporators, each of whom subscribed for one share of stock, were acting for the estate of A. C. Bilicke, and the corporation was organized for the purpose of taking over the properties of the estate and conserving them by holding, leasing and operating them as an undivided whole. On February 3, 1921, the Commissioner of Corporations of the State of California issued a permit authorizing the Fifth and Broadway Investment Co. to sell 10,000 shares of its capital stock for cash. In 1921 the corporation issued part of the authorized 10,000 shares in exchange for certain real property valued at $756,000 owned by the Bilicke estate. In 1922 it became desirable to lease certain of the real estate left by A. C. Bilicke for the term of 99 years. At this time Nancy Bilicke, now Nancy De Roulet, one of the petitioners before named, had become of full age, but the other two children of the deceased A. C. Bilicke, were still minors. The law of California prohibited a guardian of a minor's estate from executing a lease of such long duration. Therefore, in order that the lease might be executed by*2035 a legal entity authorized to do so, it was agreed between the representatives of the estate, their attorneys, and the attorneys for the Fifth and Broadway Investment Co., that the estate of A. C. Bilicke should be distributed among those entitled thereto and after such distribution each of the beneficiaries should convey and transfer to the Fifth and Broadway Investment Co. the whole of his or her portion of the estate and receive in return therefor stock of the Fifth and Broadway Investment Co. in an amount proportionate to his or her respective interest in the estate. The assets of the estate were therefore distributed among the beneficiaries. The law of California provided, however, that the estate of a minor could not be conveyed and transferred *786 except for cash, with the approval of the court having jurisdiction thereof. The attorneys for the estate discussed the agreed plan with the judge of the Probate Division of the Superior Court and after this discussion such proceedings were had that the matter of the sale of the property of the two minor children, namely, A. Constant Bilicke and Carl A. Bilicke, came on before such judge for approval. A hearing was had with*2036 reference to the approval of the sale and at this hearing there was testimony to the effect that the property of the minors had been advertised for sale as provided by statute, that a bid had been received from the Fifth and Broadway Investment Co., that it was the only bid received, that the property had been appraised within six months, and that when the transaction was completed the minors, through their guardian, would have shares of stock in the corporation in the same proportion as their interest in the estate. At the hearing on the question of approval of the sale there was also testimony to the effect that the other interested parties, namely, the two adult petitioners herein, who had an interest in the same real estate, would convey their undivided interest in the property to the corporation on the same basis as that on which the interest of the minors was transferred and that no disadvantage would be suffered by the minors in completing the transaction. It was also stated that a 99-year lease was being negotiated and that in order to complete the lease it was necessary to have a legal entity, individual or corporate, who was not prohibited by statute from executing such*2037 a lease.
On or about May 31, 1922, the Hon. James C. Rives, Judge of the Superior Court of Los Angeles County, State of California, signed an order confirming the sale of the personal property of the two minors to the Fifth and Broadway Investment Co. for the aggregate sum of $445,104.20. On June 8, 1922, the said judge signed two orders respectively approving the sale on behalf of said minors of their undivided four-ninths interest in twelve parcels of realty situate in the County of Los Angeles, State of California, and the sale on behalf of said minors of their undivided four-ninths interest in two parcels of realty situate in the County of Stanislaus, State of California. The orders recited that after advertisement duly made under the statute the said undivided four-ninths interest in the realty located in the County of Los Angeles had been sold to the Fifth and Broadway Investment Co., a corporation, for the total sum of $305,321.94, together with the assumption by the purchaser of the payment of four-ninths of a note for $150,000 secured by a mortgage on one of the parcels described. It was also recited that the undivided four-ninths interest in the property located in*2038 Stanislaus County sold to the Fifth and Broadway Investment Co. for $21,976 *787 and that the cash consideration for all the realty mentioned in the orders was to be paid on delivery of the deeds. The orders stated further that the amount to be received was 100 per cent of the appraised valuation of the undivided four-ninths interest. The orders thereupon approved the sales respectively referred to therein.
On May 22, 1922, the Fifth and Broadway Investment Co. addressed an application to the Commissioner of Corporations of the State of California, requesting permission to issue and sell for cash an additional 20,000 shares of stock. Among other things, this application contained the following paragraphs:
The purpose of this additional issue of stock is to enable the corporation to purchase certain properties formerly owned by the estate of Albert C. Bilicke, deceased, and heretofore distributed to Gladys Bilicke, Nancy Caroline Bilicke, Albert Constant Bilicke and Carl Archibald Bilicke, which said properties are now being offered for sale by Gladys Bilicke and Nancy Caroline Bilicke, and by Gladys Bilicke as guardian of the estates of Albert Constant Bilicke and Carl*2039 Archibald Bilicke, minors.
The properties now being offered for sale at the present time have been appraised at approximately $1,700,000, and additional properties having a value of more than $500,000, will be offered for sale by them within a reasonable time. In order for the corporation to purchase said properties, it will be necessary for the company to sell all of its capital stock not heretofore sold and issued.
The applicant's business is that of a family corporation for the purpose of holding, leasing and operating the properties owned by the members of said family of Albert C. Bilicke, deceased, whose names are given above, and for each and all of the purposes stated and set forth in the Articles of Incorporation.
It was also stated in the application that 7,563 shares of capital stock had been issued out of the 10,000 shares theretofore authorized to be issued, and that it was proposed that 22,437 shares, constituting all of the unissued authorized stock, be sold at par to the stockholders in proportion to their record holdings.
On June 5, 1922, the Commissioner of Corporations issued a permit authorizing the Fifth and Broadway Investment Co. to issue and sell*2040 for cash 20,000 additional shares of stock of the par value of $100 each.
Thereafter Gladys Bilicke, as guardian of the estate of the two minors, transferred to the Fifth and Broadway Investment Co. personalty belonging to the two minors referred to in the Superior Court's order of May 31, 1922, and executed and delivered a deed or deeds conveying to the same corporation the minors' undivided four-ninths interest in the realty described in the court's orders of June 8, 1922. Gladys Bilicke also in her own right transferred to the corporation the personalty received by her from the estate of A. C. Bilicke, deceased, and conveyed to the corporation her undivided one-third interest in the realty described in the said orders of the *788 Superior Court. Nancy Bilicke also transferred to the Fifth and Broadway Investment Co. her personalty received from the estate of A. C. Bilicke and executed and delivered a deed or deeds conveying to the same corporation her undivided two-ninths interest in the realty described in the orders of the Superior Court dated June 8, 1922, heretofore referred to.
Contemporaneously with the said transfers and conveyances the Fifth and Broadway Investment*2041 Co. delivered shares of its stock to Gladys Bilicke individually, to Gladys Bilicke as guardian of the two minors, and to Nancy Bilicke, now Mrs. De Roulet, in amounts respectively proportionate to the interest of the said two adults and the said two minors in the estate of A. C. Bilicke, deceased. No cash was received by either of the adult beneficiaries or by Gladys Bilicke, as guardian of the minors, as a consideration for the said conveyance and transfer. The real and personal property were entered on the books of the corporation at valuations made by the court's appraisers.
On September 28, 1926, the Fifth and Broadway Investment Co. addressed an application to the Commissioner of Corporations of the State of California, requesting that the permits issued by him dated respectively February 2, 1921, and June 5, 1922, be amended to conform to the facts with respect to the issuance and use of the stock permitted to be issued by said permits. The application of September 28, 1926, contained the following paragraph:
On June 30, 1926, there were outstanding 25,312 shares which were issued as follows:
| (a) Directors' shares sold for cash | 3 |
| (b) Shares issued in 1921 in direct | |
| exchange for real estate adjoining | |
| S.W. corner of 5th St. & Broadway, | |
| Los Angeles, appraised by Superior | |
| Court at $756,000.00 | 7,560 |
| (c) Shares issued in 1922 in direct | |
| exchange for various parcels of real | |
| estate and valuable securities appraised | |
| by Superior Court at $1,673,718.23 | |
| plus certain other items at exact | |
| cost, a total of $1,692,000.00 | 16,920 |
| (d) Shares issued in 1922 in direct | |
| exchange for real estate in West Adams | |
| St., Los Angeles at exact actual | |
| cost, $82,900.00 | 829 |
| Total shares outstanding | 25,312 |
*2042 The above described property was the property conveyed and transferred to the corporation by the beneficiaries of the Bilicke estate, as heretofore set forth. It was stated in substance in the application that no cash whatever was involved in the transactions by which the properties referred to in the above quoted paragraph were acquired by the corporation, and that it was never the intention of the corporation's officials either to sell stock or buy property, but only to exchange one for the other; that the corporation was *789 organized solely to take over the Bilicke family properties in exchange for its stock, for the purpose of keeping "the properties intact and preventing them being scattered"; that the bases of the exchange made were the appraised values fixed by the Superior Court of Los Angeles County and that the corporation desired to correct its former errors with respect to the transaction and to secure the Commissioner's official recognition of the exchange transaction which actually took place.
On October 25, 1926, the Commissioner of Corporations of the State of California issued his certificate amending the two permits hereinbefore referred to dated respectively*2043 February 3, 1921, and June 5, 1922, so that the amended permits would permit the Fifth and Broadway Investment Co. to sell and issue the 30,000 shares of its capital stock as follows:
First. To issue to Gladys Bilicke, Nancy Caroline Bilicke, Albert Constant Bilicke, Carl Archibald Bilicke, Harold E. Spear, and Arthur C. Hurt an aggregate of not to exceed, to any or all of them, 25,309 shares of its capital stock in exchange for the property described in its application theretofore as transferred to applicant.
Second. To sell and issue 4,691 shares of its capital stock at par for cash for the use and purpose recited in its application and so as to net applicant the full amount of the selling price.
The permit dated October 25, 1926, amending permits dated respectively February 3, 1921, and June 5, 1922, further set forth in substance that the Fifth and Broadway Investment Co. was organized for the principal purpose of acquiring, holding and operating business properties having a value of $2,680,900 and subject to liabilities of $150,000, and that in order to provide working capital and additional capital for the purchase of further properties the company might sell 4,691*2044 shares of its capital stock for cash.
The Fifth and Broadway Investment Co. was a family corporation, and immediately after the conveyance and transfer of property heretofore referred to the petitioners were in control thereof, the amount of stock received by the petitioners being substantially in the same proportion as their interests in the property before such conveyance and transfer.
Each of the petitioners owned a minority interest in the stock of the Fifth and Broadway Investment Co. and the stock so owned by them respectively did not have a readily realizable market value when received by the respective petitioners in 1922.
In his 60-day letters with respect to petitioners' income-tax liability for the years 1922 and 1923 the respondent stated in effect, among other things, that the deficiencies in tax therein referred to *790 were based in part on the inclusion by him in the petitioners' net income for the year 1922 of a profit derived from the sale of the petitioners' undivided interest in the estate of A. C. Bilicke.
In January, 1922, the executors of the estate of A. C. Bilicke, deceased, filed with the court having jurisdiction an accounting as of December 31, 1921. *2045 They included therein as a credit the sum of $20,336.50 representing attorney fees for professional services rendered to the estate. This sum was paid by the estate in January, 1922. In their fiduciary return for 1922 the executors deducted the said sum as a necessary expense of the estate during that year, but such deduction was disallowed by the respondent on the ground that the sum was an expenditure made in 1921.
OPINION.
VAN FOSSAN: Under the first assignment of error the petitioners contend that there should be deducted from their respective incomes for the years in question a prorated share of the sum of $8,523.50, which is a part of the fees paid by the estate of A. C. Bilicke for legal services as reported by the executors of that estate in their fiduciary return for the year 1922. The petitioners concede that the disallowance by the Commissioner of Internal Revenue of $11,813 of the amount paid as attorney fees by the estate was in accordance with law, but claim that the balance, namely, $8,523.50, which was paid during 1922 for special, necessary legal services rendered to the estate, should not have been disallowed.
The evidence in support of this issue is meager. *2046 It is clear that the amount of the fees in question was included as a disbursement in an accounting filed as of December 31, 1921, by the executors of the estate of A. C. Bilicke, deceased. It is clear too, that the fees were paid by the estate to its attorneys in January, 1922, and that the amount of the fees so paid was disallowed by the Commissioner of Internal Revenue as a necessary expense of the estate for the year 1922. There is also evidence tending to prove that the fees were paid by the estate for special and necessary legal services not connected with the ordinary administration of the estate. But the evidence discloses no reason why any part of a payment made by the estate of A. C. Bilicke and disallowed by the Commissioner of Internal Revenue as a necessary expense of the estate for the year 1922 should now be deducted from the respective incomes of these petitioners. The first issue must, therefore, be decided in favor of the respondent.
The principal question for our consideration is whether the petitioners sold their property to the Fifth and Broadway Investment Co. for cash or its equivalent, realizing a profit thereby, or whether *791 they exchanged*2047 their property for shares of the capital stock of that corporation in an amount proportionate to their respective interests in the property transferred.
We have held in various proceedings that tax liability must be determined by what actually occurred, and not by what might have occurred or ought to have taken place. ; ; ; . We think that this principle is basic to the solution of the questions now under consideration. Therefore, in accordance with the necessary implications of the principle, we must look beyond forms and procedure, beyond the court orders and the permits set out in the statement of facts, to the substance of the transactions giving rise to the controversy presented by these proceedings.
The proof shows that the petitioners were beneficiaries under the last will and testament of A. C. Bilicke, deceased; that they were residents of California; and that their property was located in that State. It is further shown that by certain statutory provisions the guardian of the two*2048 minor petitioners was prohibited from executing a desirable and advantageous lease of certain premises in which each of the minors had an undivided two-ninths interest, the two adult petitioners having the remaining five-ninths interest. Theretofore the Fifth and Broadway Investment Co. had been organized under the laws of the State of California by representatives of the Bilicke family for the purpose of holding, leasing and operating the Bilicke properties as an undivided whole and had issued to members of the Bilicke family 7,560 shares of its capital stock in exchange for certain property appraised at $756,000. The parties in interest, namely, these petitioners, therefore selected the corporation as the proper legal entity to execute the aforesaid lease. It was thereupon agreed by the parties that the estate of A. C. Bilicke, deceased, should be distributed; that the petitioners should transfer to the Fifth and Broadway Co. all of the property located in the State of California to which the petitioners became entitled under the last will of A. C. Bilicke, and that the corporation should thereupon issue to each of the petitioners, in exchange for such property, shares of its*2049 capital stock in an amount in proportion to their respective interests in the property transferred. It should be observed at this point that the proof shows that this agreement between the parties was actually carried into effect. Ultimately, the property of the petitioners was transferred to the Fifth and Broadway Investment Co., which thereupon issued shares of its stock to the petitioners in proportion to their respective interests in the property. The property was entered upon the books of the corporation at the valuation fixed by *792 court appraisers and no cash was received by any of the petitioners as a consideration for the transfer. The transaction, therefore, is characterized by all the indicia of an exchange of property for stock in a corporation.
Although it is conceded by the respondent that no cash was actually paid to the petitioners by the corporation, nevertheless it is urged on the respondent's behalf that the orders of the Superior Court of Los Angeles County, California, referred to in the statement of facts, the two permits issued by the Commissioner of Corporations of the State of California to the Fifth and Broadway Investment Co. on February 3, 1921, and*2050 June 5, 1922, respectively, together with the admitted fact that the adult petitioners transferred their property to the corporation on the same basis as the minors, are conclusive evidence that the petitioners are chargeable with the receipt of cash or its equivalent in the amount of the appraised value of the property which was transferred to the corporation by them.
In our opinion this contention is not well founded. It is apparent that the proceedings resulting in the orders of the court approving an alleged sale of the property of the minor petitioners were deemed necessary for the reason that under the statutes of California no disposition of the property of her wards could be made by the guardian of the minors without the approval of the court and that any such disposition must be, technically, under the provisions of the statute, a sale for cash. It is also apparent that no attempt was made to deceive the court as to the actual nature of the transaction to be entered into by the corporation, by the guardian of the minors and by the adult petitioners alike. As a matter of fact and law the adult petitioners were not bound by the orders of the court with reference to the*2051 property of the minors. Also it appears from the evidence that the guardian of the minors neither intended to, nor did comply with the orders of the court with respect to the sale of the minors' property for cash, but on the contrary, executed and delivered transfers of the property to the corporation without the receipt of cash. If there was a violation of the orders of the court on the part of the guardian of the minors, such violation may be a matter of concern to the court whose orders were so violated, but we are concerned only in determining what actually occurred.
This is also true of the permits of February 3, 1921, and June 5, 1922, issued to the Fifth and Broadway Investment Co. by the Commissioner of Corporations of the State of California. As a matter of fact, the books of the corporation and other evidence indicate clearly that the stock of the company was not sold for cash, with the exception of three shares issued to the three persons who organized the company and who were for a time its directors. On *793 the contrary, more than 25,000 shares of the 30,000 authorized shares were issued directly to the petitioners immediately upon the said transfer of their*2052 property in proportion to their interest in the property. The par value of these shares was the same in amount as the total appraised value of the personal and real property transferred. Therefore, when the transactions in question were completed the corporation had real and personal property equal in value to the par value of the stock issued and the members of the Bilicke family had corporate stock equal in par value to the appraised value of their respective interests in the property transferred.
On the facts, therefore, we hold that the transfer of the property in question was not a sale for cash, but was an exchange of the property for shares of the Fifth and Broadway Investment Co.
The following provisions of section 202 of the Revenue Act of 1921 are, therefore, applicable.
SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property, except that -
* * *
(c) For the purposes of this title, on an exchange or property, real, personal, or mixed, for any other such property, no gain or loss shall be recognized*2053 unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -
* * *
(3) When (A) a person transfers any property, real, personal or mixed, to a corporation and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other chasses of stock of the corporation.
Whether or not at a given time a security has a "readily realizable market value" is, in our opinion, a question of fact. In the case of *2054 , we held that whether or not property has "a fair market value" at a given date within the meaning of that phrase as used in section 202(b) of the Revenue Act of 1918 "is a question of fact to be determined from all the evidence." We think our views expressed in that case are pertinent to the question whether or not property has a "readily realizable market value" under the provisions of section 202(c) of the Act of 1921, and we have found as a fact in these proceedings that the minority *794 interests in the Fifth and Broadway Investment Co. held by each of these petitioners did not have a "readily realizable market value" at the time of the acquisition of the stock by the respective petitioners in 1922. Moreover, we have found as a fact that the amount of the stock of the Fifth and Broadway Investment Co. received by the respective petitioners was substantially in the same proportion as their interest in the property transferred and that immediately after the transfer they were in control of the said corporation, that is, they held more than 80 per cent of the voting stock which was the only class of stock of the corporation*2055 which had been issued. It follows that under the provisions of section 202(c) and (c)(3) no gain or loss may be predicated upon the transactions in question in these proceedings. We therefore hold that the transactions in question were exchanges of property for stock from which no taxable gain was derived.
In view of the conclusion we have reached with respect to the principal issue, it is unnecessary to discuss the other assignments of error.
Reviewed by the Board.
Decision will be entered under Rule 50.