*1817 Each of the petitioners, in computing his net income for 1923, is entitled to deduct, as a loss sustained in that year, the cost of shares of the capital stock of Super-Refining Process Corporation involved herein.
*678 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax which the respondent has asserted for 1923, as follows:
| Henry M. Robinson | $5,766.63 |
| William H. Davis | 2,465.19 |
| George I. Cochran | 5,060.37 |
| Estate of William E. Dunn | 1,384.64 |
| E. A. Bryant | $2,607.79 |
| William R. Staats | 3,671.03 |
| John B. Miller | 10,661.10 |
Petitioners allege that the respondent erred in disallowing as deductions from gross income, the cost to them of shares of the capital stock of the Super-Refining Process Corporation which they purchased in 1920, and which they claim became worthless in 1923.
FINDINGS OF FACT.
*1818 The petitioners Henry M. Robinson, William H. Davis, George I. Cochran, E. A. Bryant, and John B. Miller are individuals residing in California. The petitioner Nellie M. Dunn is the executrix of the last will and testament of William E. Dunn, who died August 22, 1925, a resident of California. The petitioners Isabel Staats, John Earle Jardine, and the Security-First National Bank of Los Angeles are the legatees and trustees under the last will and testament of William R. Staats, who died some time subsequent to April 2, 1928, also a resident of California.
In the year 1920 the said Henry M. Robinson, William H. Davis, George I. Cochran, William E. Dunn, E. A. Bryant, William R. Staats, and John B. Miller purchased shares of the capital stock of the Super-Refining Process Corporation, a California corporation, in the number and for the amounts following:
| Name | Number of shares | Cost |
| Henry M. Robinson | 133 1/3 | $27,000 |
| William H. Davis | 66 2/3 | 13,500 |
| George I. Cochran | 133 1/3 | 27,000 |
| William E. Dunn | 66 2/3 | 13,500 |
| E. A. Bryant | 66 2/3 | $13,500 |
| William R. Staats | 66 2/3 | 13,500 |
| John B. Miller | 133 1/3 | 27,000 |
The assets of the Super-Refining Process*1819 Corporation consisted, among other things, of 875 shares of class B preferred capital stock, and 28,993 shares of the common capital stock of the Super-Refined Metals Co., an Illinois corporation. The total outstanding capital *679 stock of the Super-Refined Metals Co. was 1,000 shares of class A preferred stock, 875 shares of class B stock, and 30,000 shares of common stock. During the year 1923 the Super-Refining Process Corporation and the Super-Refined Metals Co. became financially involved, and on or about November 16, 1923, the liabilities of each corporation exceeded the value of its assets.
The Super-Refined Metals Corporation was organized on November 9, 1923, under the laws of the State of California, and on November 16, 1923, it made offers to the Super-Refining Process Corporation and the Super-Refined Metals Co. to purchase all of the assets of those corporations. Said offers, except as to the name of the companies to which they were made, were identical and were as follows:
OFFER.
Super-Refined Metals Corporation, a corporation organized and existing under and by virtue of the laws of the State of California, hereby offers to purchase of and from Super-Refining*1820 Process Corporation, a corporation organized under the laws of the State of California, all of the assets and property, both real and personal, belonging to said Super-Refining Process Corporation, or to which it may be entitled; said assets being more particularly described in Exhibit A, hereto attached and by this reference made a part hereof, upon the consideration if this offer is accepted within the time herein limited of the assumption by said Super-Refined Metals Corporation of the debts and liabilities of said Super-Refining Process Corporation, in accordance with the schedule of said debts and liabilities hereto attached, marked Exhibit B and by this reference made a part hereof.
Upon the acceptance of this offer within the time hereinafter limited, said Super-Refined Metals Corporation does hereby undertake, agree, warrant and guarantee to and with said Super-Refining Process Corporation, that it will save said Super-Refining Process Corporation free and harmless of and from the payment of any and all debts and liabilities set forth in said Exhibit B and will pay and discharge each and all of said debts and liabilities. This offer must be accepted or rejected by five*1821 days from the date hereof.
(Signed) SUPER-REFINED METALS CORPORATION.
BY ALFRED WRIGHT,
Its President.
BY HENRY R. SCHULTHEIS,
Its Secretary.
Dated November 16, 1923.
Said offers were accepted by the boards of directors of the Super-Refining Process Corporation and the Super-Refined Metals Co. by resolutions which were in part as follows:
It appearing to the Board that this corporation is indebted to various persons, firms and corporations in an amount in excess of the value of its present assets and that an extensive reorganization of the corporation will be necessary in order to pay and discharge the existing liabilities and it further appearing from the discussion at this meeting that assessments on the stock of *680 the corporation are impracticable as a means of raising sufficient funds to pay such indebtedness, and it further appearing that the stockholders of this corporation will be given an opportunity to subscribe for, and purchase stock of Super-Refined Metals Corporation in order to enable them to continue to secure such benefits as may be available from the ownership and operation of this company's assets, on motion of Director Dunn, seconded*1822 by Director Robinson, and unanimously carried by the affirmative vote of all directors present, it was
RESOLVED, that this corporation accept the offer of Super-Refined Metals Corporation dated November 16, 1923, to purchase the assets of this corporation in consideration of the assumption by said Super-Refined Metals Corporation of this corporation's debts and liabilities, as set forth in the schedule thereof to be made a part of the minutes of this meeting.
The assets of the two old corporations, subject to their liabilities, were transferred to the new corporation on December 24, 1923. The Super-Refining Process Corporation assigned and transferred to its stockholders in proportion to their stockholdings, all of the rights of the Super-Refining Process Corporation "to subscribe for, purchase or otherwise acquire the capital stock of Super-Refined Metals Corporation, a California corporation." No other distribution was made by either of the old corporations to its stockholders, and the old corporations were thereafter dissolved.
On December 4, 1923, the Super-Refined Metals Corporation made application to the Commissioner of Corporations of the State of California to issue*1823 1,000 shares of the preferred capital stock of the corporation, and 1,000 shares of the common capital stock of the corporation, out of a total authorized stock of 3,000 shares of preferred stock of the par value of $100 each, and 2,000 shares of common stock of no par value, to the following individuals, thirty in number, or to any of them:
Barker Brothers, Inc.
Mrs. O. S. Beaton
J. H. HolmesGeorge I. Cochran
W. L. ValentineGeorge A. Beaton
John B. Miller
W. E. DunnHenry M. Robinson
Harry J. Bauer
R. E. HicksCarrie B. McCall
George F. Gillespie
Alex B. Downe
Edith G. Benjamin
Duncan MacKinnon
H. L. CongerGladys M. Elliott
Marion S. Elliott
E. D. ElliottBuford M. Elliott
Margaret Martin
A. H. CongerMadge E. Leonard
W. S. Pirie H. J. Lytle J. E. Norris O. L. Chaffin F. R. HoltKate W. Pirie
at $99 per share for said preferred stock and $1 per share for said common stock. Said application was granted by the Commissioner of Corporations of the State of California on December 13, 1923. The petitioners William H. Davis, E. A. Bryant, or William R. Staats were not named in said application or permit, and each of them*1824 purchased his shares of stock in the Super-Refined Metals Corporation from Harry J. Bauer.
*681 The following eleven persons were stockholders of the Super-Refining Process Corporation at the time it transferred its assets and liabilities to the Super-Refined Metals Corporation:
| Name | Address | Number of |
| shares | ||
| W. A. Barker | No. 724 South Broadway, Los Angeles, Calif | 66 2/3 |
| Dr. E. A. Bryant | L. A. Railway Building, Los Angeles Calif | 66 2/3 |
| W. H. Davis | Pacific Mutual Building, Los Angeles, Calif | 66 2/3 |
| W. E. Dunn | Los Angeles Railway Building, Los Angeles, | 66 2/3 |
| Calif | ||
| W. L. Valentine | 1124 Merchants National Bank Building, | 66 2/3 |
| Los Angeles, Calif | ||
| Alfred H. Wilcox | Wilcox Building, Los Angeles, Calif | 66 2/3 |
| Wm. R. Staats | No. 65 South Raymond Avenue, Pasadena, Calif | 66 2/3 |
| George I. Cochran | Pacific Mutual Building, Los Angeles, Calif | 133 1/3 |
| John B. Miller | Edison Building, Los Angeles, Calif | 133 1/3 |
| Henry M. Robinson | No. 707 South Spring Street, | 133 1/3 |
| Los Angeles, Calif | ||
| Harry J. Bauer | 700 California Bank Building, | 133 1/3 |
| Total | Los Angeles, Calif | 1,000 |
The following were the stockholders of the Super-Refined*1825 Metals Co. at the time it transferred its assets and liabilities to the Super-Refined Metals Corporation:
| Number of shares held | |||
| Name and address | Preferred | Preferred | Common |
| A | B | ||
| Barker Brothers (Inc.), 724 South Broadway, | 25 | 25 | |
| Los Angeles, Calif | |||
| Harry J. Bauer, 700 California Bank Building, | 1 | ||
| Los Angeles, Calif | |||
| George I. Cochran, Pacific Mutual Building, | |||
| Los Angeles, Calif | 1 | ||
| W. L. Valentine, 1124 Merchants National Bank | |||
| Building, Los Angeles, Calif | 1 | ||
| John B. Miller, Edison Building, Los Angeles, | |||
| Calif | 1 | ||
| W. E. Dunn, Los Angeles Railway Building, Los | |||
| Angeles, Calif | 1 | ||
| Henry M. Robinson, First National Bank, Los | |||
| Angeles, Calif | 1 | ||
| Super-Refining Process Corporation, | |||
| 700 California Bank Building, Los Angeles, Calif | 875 | 28,993 | |
| Edith G. Benjamin, U.S. Grant Hotel, San Diego, | |||
| Calif | 2 | 2 | |
| Mrs. O. S. Beaton, 787 Lincoln Avenue, Pasadena, | |||
| Calif | 215 | 215 | |
| H. L. Conger, care of A. H. Conger, 631 San | |||
| Fernando Building, Los Angeles, Calif | 5 | 5 | |
| A. H. Conger, 631 San Fernando Building, Los | |||
| Angeles, Calif | 1 | 1 | |
| O. L. Chaffin, U.S. Grant Hotel, San Diego, Calif | 2 | 2 | |
| Alex B. Downe, 540 I. W. Hellman Building, Los | |||
| Angeles, Calif | 10 | 10 | |
| Gladys M. Elliott, 1729 West Thirty-ninth | |||
| Street, Los Angeles, Calif | 1 | 1 | |
| Marion S. Elliott, 1729 West Thirty-ninth | |||
| Street, Los Angeles, Calif | 1 | 1 | |
| E. D. Elliott, box 188, route B, Modesto, Calif | 1 | 1 | |
| Buford M. Elliott, First National Bank Building, | |||
| Los Angeles, Calif | 1 | 1 | |
| George F. Gillespie, 2222 Fourth Street, San | |||
| Diego, Calif | 15 | 15 | |
| R. E. Hicks, San Diego, Calif | 10 | 10 | |
| J. H. Holmes, 677 South Hudson Street, Pasadena, | |||
| Calif | 180 | 180 | |
| F. R. Holt, care Alexander Reynolds, jr., | |||
| San Diego, Calif | 5 | 5 | |
| Kelly Metals Co., Detroit, Mich | 500 | 500 | |
| H. J. Lytle, 2421 Fast Fourth Street, Los | |||
| Angles, Calif | 1 | 1 | |
| Madge E. Leonard, Globe Mills, Brawley, Calif | 1 | 1 | |
| Carrie B. McCall, No. 713 West Seventh Street, | |||
| Los Angeles, Calif | 5 | 5 | |
| Duncan MacKinnon, U.S. National Bank, | |||
| San Diego, Calif | 5 | 5 | |
| Margaret Martin, Buena Park, Calif | 1 | 1 | |
| J. E. Norris, care Alexander Reynolds, jr., | |||
| San Diego, Calif | 10 | 10 | |
| W. S. Pirie, 501 Colby Abbott Building, | |||
| Milwaukee, Wis | 2 | 2 | |
| Kate W. Pirie, 501 Colby Abbott Building, | |||
| Milwaukee, Wis | 1 | 1 | |
| A. H. Wilcox, Wilcox Building, Los Angeles, Calif | 1 | ||
| Total | 1,000 | 875 | 30,000 |
*1826 *682 On December 31, 1923, the stockholders of the Super-Refined Metals Corporation were as follows:
| Name and address | Shares of | Shares of |
| preferred | common | |
| stock | stock | |
| G. Lawrence Barker, 724 South Broadway, Los Angeles, | ||
| Calif | 40 | 40 |
| Dr. E. A. Bryant, Los Angeles Railway Building, Los | ||
| Angeles, Calif | 40 | 40 |
| W. H. Davis, Pacific Mutual Building, Los Angeles, Calif | 40 | 40 |
| Delano Land Co., 700 California Bank Building, Los | ||
| Angeles, Calif | 148 | 141 |
| W. E. Dunn, Los Angeles Railway Building, Los Angeles, | ||
| Calif | 40 | 40 |
| W. L. Valentine, 1124 Merchants National Bank, Los | ||
| Angeles, Calif | 40 | 40 |
| Alfred H. Wilcox, Wilcox Building, Los Angeles, Calif | 40 | 40 |
| Wm. R. Staats, 65 South Raymond Avenue, Pasadena, Calif | 40 | 40 |
| George I. Cochran, Pacific Mutual Building, Los Angeles, | ||
| Calif | 80 | 80 |
| John B. Miller, Edison Building, Los Angeles, Calif | 80 | 80 |
| Henry M. Robinson, 707 South Spring Street, Los Angeles, | ||
| Calif | 80 | 80 |
| Harry J. Bauer, 700 California Bank Building, Los | ||
| Angeles, Calif | 194 | 194 |
| Alexander Macdonald, 800 California Bank Building, Los | ||
| Angeles, Calif | 1 | |
| A. E. Morphy, 700 California Bank Building, Los Angeles, | ||
| Calif | 1 | |
| J. D. McLachlan, 800 California Bank Building, | ||
| Los Angeles, Calif | 1 | |
| Kenyon L. Reynolds, 700 California Bank Building, Los | ||
| Angeles, Calif | 1 | |
| Henry R. Schultheis, 800 California Bank Building, | ||
| Los Angeles, Calif | 1 | |
| Alfred Wright, 800 California Bank Building, Los | ||
| Angeles, Calif | 1 | |
| Frederick W. Williamson, 800 California Bank Building, | ||
| Los Angeles, Calif | 1 | |
| Total | 862 | 862 |
*1827 Of the thirty-two stockholders of the Super-Refined Metals Co., only seven subscribed for stock in the Super-Refined Metals Corporation. Of the eleven stockholders of the Super-Refining Process Corporation, ten, including the petitioners herein, subscribed for stock of Super-Refined Metals Corporation. Several of the other stockholders of Super-Refined Metals Corporation were creditors of the two old corporations.
No stockholder of either the Super-Refining Process Corporation or Super-Refined Metals Co. was required, legally or otherwise, to subscribe for any stock in the Super-Refined Metals Corporation. The stockholders of the two old corporations who did subscribe for stock of the new corporation paid cash therefor. Three out of the seven petitioners in these cases did not receive originally issued stock of the Super-Refined Metals Corporation, but each purchased his stock from Harry J. Bauer.
In their returns of income for the year 1923 the said Henry M. Robinson, William H. Davis, George I. Cochran, William E. Dunn, E. A. Bryant, William R. Staats, and John B. Miller each deducted, as a loss sustained in that year, the cost to him of his shares of the capital stock*1828 of the Super-Refining Process Corporation. The respondent disallowed the deduction.
OPINION.
MARQUETTE: The petitioners in 1920 purchased shares of the capital stock of the Super-Refining Process Corporation, and, after the transaction described in the findings of fact, in computing their net *683 incomes for 1923 they deducted the cost of the stock as losses sustained in that year. The respondent disallowed the deductions, and he contends that the transaction was a reorganization of the Super-Refining Process Corporation and the Super-Refined Metals Co., and that under section 202(c)(2) of the Revenue Act of 1921 no loss should be recognized. Said section provides that:
(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized 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 -
* * *
(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or*1829 securities in a corporation a party to or resulting from such reorganization. The word "reorganization" as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form, or place of organization of a corporation, (however effected) * * *.
It is not necessary for us to discuss or decide whether the transaction, or series of transactions whereby the petitioners surrendered or otherwise disposed of their stock in the Super-Refining Process Corporation and acquired stock in the Super-Refined Metals Corporation, constituted a reorganization of the two old companies. Assuming that there was a reorganization within the meaning of section 202(c)(2) of the Revenue Act of 1921, as contended by the respondent, it nevertheless does not follow that the reorganization was carried out in such a way as to prevent recognition of gain or loss, if there was gain or loss in fact. None of the*1830 petitioners received "in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization." In the case of , the Board, in considering a situation strikingly similar to the one here presented, said:
It may be conceded that the purpose and plan of this transaction was a reorganization of the Old Company, but that fact is not determinative of the question here nor is it of any essential significance. We are concerned only with whether or not the petitioner received 24,788 shares of common stock in the New Company, plus cash, in exchange for stock in the Old Company, within the meaning of the Act. And this question must be resolved upon what was actually done, and not the effect of what was done (, nor upon what may have been the design and purpose of the parties to the transaction (. Neither is it material that the same result might have been obtained by some *684 other method or plan of reorganization. In the case of *1831 , we said:
It seems to us to be fundamentally unsound to determine income-tax liability by what might have taken place rather than what actually occurred. Even though the practical effect may be the same in either case, the resulting tax liability may be quite different. .
Speaking generally, in determining what was actually done in any case, this Board will regard substance rather than form. However, material and essential facts will not be dismissed or put aside as mere matters of form simply because they are related to and are steps in a comprehensive plan of reorganization, or together constitute a method for the attainment of a single desired result. . In the instant case each step employed to bring about the ultimate result was essential to the consummation of the transaction, and it can not be said that each, or any one, was not substantial.
At the beginning of the transactions set forth in our findings, the petitioner possessed 1,858 shares of stock in the Old Company; at the conclusion he possessed a*1832 certain amount of cash and 24,788 shares of new stock. It does not necessarily follow, however, that the new stock was obtained in exchange for old stock. The old stock was not transferred or assigned to the New Company, and the new stock was not acquired from the Old Company. Neither company at any time acquired or owned any stock in the other. The two companies were separate and independent entities. The Old Company sold its assets in the New Company and received cash in payment. The petitioner, as agent of the stockholders of the Old Company, acquired the new stock from the New Company and paid cash for the same. As a stockholder of the Old Company he received his proportion of the cash dividend declared and distributed by that company. The fact that the petitioner promoted the reorganization and represented the interested parties in handling the details, does not alter the true character of the transactions.
The sale by the Old Company of its assets to the New Company, the distribution by the Old Company of the cash dividend to its stockholders, and the purchase by the latter of stock from the New Company, were separate transactions between independent entities. The*1833 fact that these several transactions together comprised a single plan of reorganization does not render them any the less separate and distinct undertakings. The nature of each transaction is determinable from the facts relating to it, and is not changed because of its association with other transactions in a larger and more comprehensive plan.
What happened in the instant cases was that the two old corporations were financially involved and the value of their assets was less than the amount of their debts. The new corporation purchased their assets and in payment assumed all of the debts of the old corporations, a valuable and adequate consideration, and the equivalent of cash. The petitioners and a number of the other stockholders of the old corporations subscribed for stock of the new corporation, for which they paid cash, substantially at par. The petitioners' shares of stock in the Super-Refining Process Corporation were not at any time transferred to the new corporation. On the other hand, the stock was worthless and upon the dissolution of the Super-Refining Process Corporation the petitioners received nothing, except possibly *685 the right to subscribe to and*1834 purchase stock of the new corporation. What they did get out of the transaction, or series of transactions, was new stock in a new corporation for a new investment of money.
It is our opinion that each of the petitioners sustained a loss in 1923 in the amount of the cost to him of his shares of the capital stock of the Super-Refining Process Corporation, and that the respondent erred in disallowing deductions taken on account of those losses.
Decision will be entered under Rule 50.