*827 1. An agreement for assignment of an interest in oil and gas leases, executed in 1929, provided for initial payment on January 1, 1930, and monthly payments thereafter to September 1, 1932, with privilege of paying all or any part at any payment date; and contained conditions as to furnishing abstracts, good title, payment of taxes, payment of certain expenses of operation, delivery of possession on January 1, 1930, and delivery of assignment of lease only upon completion of all payments, the assignments of lease until payment to be held by a trustee. Assignments were delivered to assignee in 1929. Held, the sale was not shown to have been completed in 1929, and the obligation to pay for the assignment was one payable on the installment basis, as reported by assignor.
2. Held, following Halliburton v. Commissioner, 78 Fed.(2d) 265, and Claude Neon Lights, Inc.,35 B.T.A. 424">35 B.T.A. 424, that cash exchanged for stock and bonds in petitioner corporation in connection with the exchange of the installment obligation for stock and bonds in petitioner, was "property" within the purview of section 113(a)(7) and (8), Revenue Act of 1928; held, further,*828 on the facts, that the cash was exchanged for stock and bonds in petitioner corporation, as a part of the same transaction with the exchange of the installment obligation by predecessor corporation for stock and bonds in petitioner corporation, and that the transferors immediately after the transfer had more than an 80 percent interest in or control of such property, and of petitioner corporation, in substantial proportion to their interests prior to the transfer.
3. Held, that section 44(d), Revenue Act of 1928, does not recognize gain or loss upon exchange of an installment obligation in a nontaxable exchange in connection with a reorganization, that recognition is to be determined under section 112, installment obligations being no exception thereto, and that under section 113(a)(7) and (8), the basis for such installment obligation is not increased by gain, or decreased by loss, under section 44(d).
*758 The Commissioner determined an income tax liability against the petitioner for the year 1931, as follows: Deficiency in tax, $114,804.32; *829 penalty, $57,402.16; total tax and penalty, $172,206.48. Both the petition and the answer thereto were amended and the petition as amended alleges - which is denied in the amended answer - that in the determination of tax and penalty set forth in the notice of deficiency the following errors were committed:
(a) The Commissioner, in computing gain on amounts received by petitioner in liquidation of a contract of Continental Oil Company which had been assigned to petitioner, used the cost basis of such contract to the prior holder; whereas the Commissioner should have used the cost of such contract to petitioner, or, in the alternative, the basis of said contract to the former holder thereof increased in the amount of gain recognized to such former holder upon the transfer of said contract to petitioner under the law applicable to the year in which the transfer was made. The Commissioner alleges that such basis to the former holder is $101,786.34, and determines the deficiency by using this amount as the basis for the contract to petitioner; whereas he should have used as such basis the cost to petitioner of the contract which was not less than $1,104,000, or, in the alternative, *830 the basis of said contract to the former holder thereof increased in the amount of gain recognized to such former holder upon *759 the transfer of said contract to petitioner under the law applicable to the year in which the transfer was made, which basis as so increased was, upon information and belief, not less than $1,104,000.
(b) The Commissioner has erred in determining a penalty of $57,402.16 under section 293(b) of the Revenue Act of 1928.
At the hearing oral testimony and documentary evidence were introduced and in addition thereto a lengthy stipulation of certain agreed facts was filed and is adopted as a part of our findings of fact, but set forth herein only to an extent deemed necessary to an understanding and determination of the issues involved.
FINDINGS OF FACT.
The petitioner, Portland Oil Co., is a corporation, duly organized under the laws of the State of Maine on December 2, 1930. At organization it had an authorized capital stock of $48,300, divided into 483 shares of stock of the value of $100 each.
On December 4, 1930, and until January 2, 1931, the officers and directors of the petitioner were as follows: Donald W. Philbrick, president; *831 Coburn Herndon, treasurer; Mildred J. McCarty, assistant treasurer; Robinson Verrill, clerk; said Philbrick, McCarty, and Verrill being the directors.
The Bu-Vi-Bar Petroleum Corporation (hereinafter at times referred to as Bu-Vi-Bar), a Delaware corporation, was organized about 1917 or 1918 and prior to December 15, 1930, actively operated an oil business in Oklahoma and Kansas. On December 15, 1930, J. Garfield Buell and Seth W. Herndon were sole stockholders of the corporation and at all times in December 1930 J. Garfield Buell was president and Seth W. Herndon, vice president.
On December 15, 1930, J. Garfield Buell owned 8,957 shares of the outstanding capital stock and Seth W. Herndon owned 2,982 shares thereof, of the par value of $25 each.
Ethel P. Buell, wife of J. Garfield Buell, and Betty Jane Buell, his daughter, and Gertrude Woods Herndon, wife of Seth W. Herndon, were never stockholders or officers of Bu-Vi-Bar. Said women are herein at times referred to collectively as "the women."
On December 16, 1929, a contract was entered into between J. Garfield Buell and the Bu-Vi-Bar Petroleum Corporation as "first parties" and the Continental Oil Co., a Delaware*832 corporation, as "second party." Under that contract the Bu-Vi-Bar Petroleum Corporation (it is stipulated):
* * * agreed to assign and transfer to Continental Oil Company its one-tenth (1/10) interest in and to certain leases of oil properties in Kansas and equipment relating thereto, the consideration for such transfer being the agreement of Continental Oil Company to pay therefor the principal sum of *760 $1,650,000 in instalments beginning on the first day of January, 1930 and continuing through October 1, 1932, together with interest at six per cent. (6%) per annum on the unpaid balance due on the purchase price on each monthly paying period. The contract further provided that Continental Oil Company should have the option on the first day of any month to anticipate payments and to pay any part or all of the unpaid balance of the purchase price and interest thereon to the date of payment. * * * The assignments referred to in said contract were executed and delivered to Continental Oil Company on December 17, 1929.
During 1930 and prior to December 30, 1930, Bu-Vi-Bar Petroleum Corporation received principal monthly payments aggregating $555,000, together with interest, *833 from Continental Oil Company under the aforesaid contract with Continental Oil Company dated December 16, 1929. The basis to Bu-Vi-Bar Petroleum Corporation, for determining the gain or loss on the sale or other disposition of the leases and property which were the subject matter of the aforesaid contract with Continental Oil Company was $153,378.11. The portion of this basis attributable under the installment method to collections by Bu-Vi-Bar Petroleum Corporation in 1930, was $51,591.77. Bu-Vi-Bar Petroleum Corporation reported the profit arising from the sale under the said contract dated December 16, 1929 of the leases and property rights to Continental Oil Company on its Federal Income Tax Return for the calendar year 1930 on the installment basis and reported $503,408.23 on account thereof on said return as taxable income. * * * The balance of the gain which would have been taxable in the hands of Bu-Vi-Bar Petroleum Corporation if it had collected the remaining $1,095,000 and had been taxable thereon when collected would have been $993,213.66.
The contract recited that it was in consideration of payment and the faithful performance of covenants and agreements to be kept*834 and performed by the parties, that abstracts of title were to be delivered, showing a merchantable title, free of liens and encumbrances, which abstracts were to be examined and, if defects in title were found, they were to be corrected or perfected within a reasonable time after notice thereof; that certain taxes were to be paid by the assignors; that the assignors (Bu-Vi-Bar and Buell) would pay indebtedness incurred in the development and operation of the leasehold up to January 1, 1930, at 7 a.m., said indebtedness to include cost of warehouse stocks, rigs, derricks, casing, oil and gas field equipment, and labor due in the development or operation of the leases as of 7 a.m., January 1, 1930 (except equipment or drilling wells not completed by that date); that the Guaranty Trust Co. of New York is designated as trustee; that assignments of the property sold shall be deposited with the Guaranty Trust Co. of New York, which is authorized and empowered to hold same in its possession until payment of the purchase price, with interest thereon, payment to be made to the Guaranty Trust Co. of New York for the use and benefit of the assignors, and that upon such payment the Guaranty Trust*835 Co. of New York shall deliver the assignments. The assignments were delivered to the Continental Oil Co. in 1929.
*761 The transaction was reported in a schedule attached to the income tax return of Bu-Vi-Bar for the year 1930 (some immaterial details omitted), as follows:
The Sedgwick County Block of which we owned a 1/10 working interest was sold to the Continental Oil Company of Ponca City, Oklahoma, and is to be paid for by installments over a period of years as set forth in a contract between the Continental Oil Company and ourselves.
| The Contract sale price for 1/10 Sedgwick County Block | $1,650,000.00 |
| Cost of assets sold (details omitted) | 153,378.11 |
| Total profit to be realized when all installments are paid | 1,496,621.89 |
| Installments received in year 1930 ($555,000.00) is [sic] 33.6363% of total sales price. Under Section #44 of Revenue act we are reporting for profit in 1930, 33.6363% of total profit to be realized when all installments are paid. | |
| Total profit to be reported in year 1930 | 503,408.23 |
| Contingent profit yet to be realized | 993,213.66 |
In the early part of the year 1930, "Buell-Herndon & Company, Inc.," was organized, *836 and Bu-Vi-Bar assigned or transferred all its assets to that company, except its contract with the Continental Oil Co.
Bu-Vi-Bar and its officers knew that there would be gain realized and taxes to be paid as a result of the sale to Continental Oil Co. of its said one-tenth interest in certain leases of oil properties.
To the income tax return of Bu-Vi-Bar filed by it for the year 1930 and accepted by the Commissioner, there were attached statements or "riders", as follows:
Early in 1930, in pursuance of a plan of re-organization of this corporation and the Buell-Herndon & Company, Inc., this corporation re-organized by transferring certain of its assets (being all of its assets except one contract) to Buell-Herndon & Company, Inc., a Delaware corporation organized for this express purpose, in exchange for 11,939 shares of the stock of the Buell-Herndon & Company, Inc., which thereafter constituted its entire outstanding and issued stock.
Immediately thereafter and in pursuance of the same plan of re-organization, there was distributed to the stockholders in Bu-Vi-Bar Petroleum Corporation all of the stock of Buell-Herndon & Company, Inc., so acquired, without the surrender*837 by such stockholders of stock or securities in any corporation.
* * *
On December 30, 1930 and in pursuance of a plan of re-organization of Bu-Vi-Bar Petroleum Corporation and Portland Oil Company, Bu-Vi-Bar Petroleum Corporation re-organized by transferring all of its assets to Portland Oil Company in exchange solely for $960,000.00 aggregate principal amount of sixty-year 6% Convertible Coupon Gold Bonds of Portland Oil Company and 1,440 shares of stock of Portland Oil Company.
Immediately thereafter, and in pursuance of the same plan of re-organization, Bu-Vi-Bar Petroleum Corporation distributed all of such bonds and stock of *762 Portland Oil Company to the holders of the outstanding capital stock of Bu-Vi-Bar Petroleum Corporation in complete dissolution of Bu-Vi-Bar Petroleum Corporation, and the stockholders thereof thereupon surrendered their shares of stock of Bu-Vi-Bar Petroleum Corporation to such corporation for cancellation and redemption.
In September 1930, J. Garfield Buell was in Boston, Massachusetts, and while there conferred with one Malcolm Donald, a member of the law firm of Herrick, Smith, Donald & Farley, with reference to the problem of taxation*838 and some ideas as to making gifts to his family, and the best method of legally handling the situation.
Nothing at that conference was determined, other than that said Donald would consider the subject and Buell could later see him or he would get in touch with Buell. Buell, upon his return to Tulsa, Oklahoma - where he and Seth W. Herndon both lived - told Herndon of his aforesaid Boston conference, knowing Herndon also had been contemplating making a gift to his wife. In November 1930, Buell and Herndon went to Boston and there had a conference with Donald and George R. Blodgett, another member of said law firm, who thereafter became the active counsel and directing adviser of both Buell and Herndon. A plan was evolved by Blodgett which was essentially what was later carried out: That there would be stepped-up value for the Continental Oil Co. contract, and the Portland Oil Co. would not pay tax on that money; that Bu-Vi-Bar would be eliminated; that gifts of money would be made to members of their families by both Buell and Herndon, and a new corporation, the Portland Oil Co., formed with subscriptions to its stock and bonds by the women.
The wives and the daughter were*839 informed of the plan. Buell and Herndon had reason to believe that the women would purchase the securities of the petitioner corporation. Buell suggested it to his wife and daughter and got the impression that they were going to do it. Herndon's wife thought the plan was satisfactory and the securities were going to appeal to her, and that she intended to do it (buy the securities). Buell's wife, in response to Buell's suggestion that the money given her be put in the Portland Oil Co., said she was willing. Buell's daughter, fifteen years of age, was advised by her father about the plan. He suggested that she invest the money given her in the Portland Oil Co., and she told him that she thought it was a good idea, and she would like to do so. She relied upon her father's advice.
Neither Buell nor Herndon was familiar with tax laws and, with respect to such and other matters about which Blodgett advised them, they relied on his advice and suggestions, which were accepted and followed by them and the women.
*763 Buell and Herndon were advised that the gifts which they contemplated making the women should be bona fide gifts, with no expectation of getting back the gifts*840 or borrowing from the women the money given them. It is stipulated, and we find:
On December 6, 1930, J. Garfield Buell borrowed $276,000 from The First National Bank & Trust Company ofTulsa, Oklahoma, and gave his thirty day promissory note therefor to said bank. On the same day, December 6, 1930, Seth W. Herndon borrowed $92,000 from said bank and likewise gave his thirty day promissory note to said bank therefor. The amounts so borrowed by Messrs. Buell and Herndon were forthwith credited to their respective bank accounts in The First National Bank & Trust Company of Tulsa, Oklahoma.
On December 6, 1930, a letter signed by J. Garfield Buell was addressed and sent to The Commercial National Bank at Muskogee, Oklahoma, enclosing a check, bearing the same date, for $184,000. * * * Said check was credited to the amount of Mrs. J. Garfield Buell in said bank on December 8, 1930, and was charged to the account of J. Garfield Buell in The First National Bank & Trust Company, Tulsa, Oklahoma, on the same day. On December 6, 1930, a letter signed by J. Garfield Buell was addressed and sent to The First National Bank & Trust Company of Tulsa, Oklahoma, enclosing a check, bearing*841 the same date, in the amount of $92,000. * * * Said check was credited to the account of Miss Betty Jane Buell in said bank onDecember 6, 1930, and was charged to the account of J. Garfield Buell in said bank on the same date. On December 6, 1930, a letter signed by Seth W. Herndon was addressed and sent to The First National Bank & Trust Company of Tulsa, Oklahoma, enclosing his check, bearing the same date, in the amount of $92,000. * * * Said check was credited to the account of Mrs. Gertrude Woods Herndon in said bank on December 6, 1930 and charged to the account of Seth W. Herndon in said bank on the same date.
Ethel P. Buell subscribed for 240 shares of the authorized capital stock of the Portland Oil Co. at $100 a share and for $160,000 principal amount of 60-year 6 percent gold bonds of the Portland Oil Co. at par. Under date of December 6, 1930, she gave her check to the order of the Portland Oil Co. in the amount of $184,000 in payment of said subscriptions, which check was, on December 8, 1930, charged to her account in the First National Bank & Trust Co.
Gertrude Woods Herndon subscribed for 120 shares of the authorized capital stock of the Portland Oil Co. at*842 $100 a share and for $80,000 principal amount of the aforesaid bonds of the Portland Oil Co. at par. Under date of December 6, 1930, she gave her check to the order of the Portland Oil Co. in the amount of $92,000 in payment of said subscriptions and on said date the check was charged to her account in the First National Bank & Trust Co.
Betty Jane Buell subscribed for 120 shares of the authorized capital stock of Portland Oil Co. at $100 a share and for $80,000 principal amount of the aforesaid bonds of the Portland Oil Co. In payment for the same she gave her check under date of December 3, 1930, to the Portland Oil Co. in the amount of $92,000, which check was charged to her account in the First National Bank & Trust Co.
*764 All aforesaid checks, aggregating $368,000, on December 6, 1930, were deposited to the credit of the Portland Oil Co. in the First National Bank & Trust Co. and remained on deposit in that bank to the credit of the Portland Oil Co. until January 5, 1931, at which time the account was charged with checks as hereinafter stated.
On December 8, 1930, the Portland Oil Co. issued, pursuant to subscription, one share of its capital stock, par $100, *843 in the name of each of the following: Donald W. Philbrick, Mildred J. McCarty, and Robinson Verrill; and a check for $300 representing the par of the aforesaid shares was on December 12, 1930, deposited to the credit of the Portland Oil Co. in its account in the First National Bank & Trust Co. It is stipulated, and we find:
Under date of December 8, 1930, 120 shares of petitioner's capital stock were issued in the name of Mrs. Gertrude Woods Herndon; 120 shares were issued in the name of Betty Jane Buell; and 240 shares were issued in the name of Mrs. Ethel P. Buell. Also under date of December 8, 1930, petitioner's bonds in the aggregate principal amount of $160,000 were issued and registered in the name of Mrs. Ethel P. Buell; $80,000 principal amount of petitioner's bonds were issued and registered in the name of Betty Jane Buell; and $80,000 principal amount of petitioner's bonds were issued and registered in the name of Mrs. Gertrude Woods Herndon.
On or about December 17, 1930, the aforesaid shares of capital stock of the Portland Oil Co. and the bonds of that company subscribed for, issued, and registered in the name of Ethel P. Buell were forwarded to the Commercial*844 National Bank of Muskogee, Oklahoma. About the same date, the capital stock and bonds of the Portland Oil Co., subscribed for, issued, and registered in the names of Gertrude Woods Herndon and Betty Jane Buell were forwarded to the First National Bank & Trust Co.
The letters which each of the three women sent said banks under said date touching the securities forwarded them were prepared or written in accordance with the advice of Blodgett and each contained this identical language:
Please keep these securities in safekeeping for my account and do not deliver them to anyone except on written instructions signed by me personally. I have given no one a general power of attorney to represent me, but should I in the future give anyone such a general power of attorney you will please understand that it is not to be construed to permit of the delivery you to such attorney of any of these securities, which are to be delivered only on my personal order or on my specific written order calling for delivery of the same.
Please detach the coupons as they fall due, collect them, and credit the proceeds to my checking account in your bank.
On December 15, 1930, at a meeting of the board*845 of directors of the Bu-Vi-Bar Petroleum Corporation, it was deemed advisable that said corporation be ultimately dissolved and it was:
*765 RESOLVED: that the Board of Directors recommends to the stockholders that, as one of a series of distributions in complete liquidation and redemption of all of the stock of the Corporation, there be distributed to all of the stockholders of the Corporation ratably, either in kind or after conversion into cash as the officers of the Corporation shall determine, all of the net assets of the Corporation (as they shall exist after any such conversion), excepting only its contract with Continental Oil Company dated December 16, 1929, and its rights thereunder, and that such distribution be in complete cancellation and redemption of one-third of the shares of the capital stock of the Corporation held by each stockholder and also such further portion of a share of stock held by each such stockholder as may be necessary to so cancel and redeem full shares of stock only and to avoid the cancellation and redemption of fractional shares of stock; that each stockholder of the Corporation shall be entitled to select such shares as he determines for*846 surrender as aforesaid not exceeding the maximum before stated; and that upon such distribution the capital stock of this corporation be reduced by the aggregate par value of the shares so cancelled and redeemed and that the certificates for the said shares, as selected by the stockholders, be cancelled.
Written consent to the action taken by the board of directors was given by the stockholders of the corporation, J. Garfield Buell and Seth W. Herndon being the holders of record of all the capital stock therein.
Thereafter, on or about December 17, 1930, J. Garfield Buell received from the corporation $222,576.46 in cash and securities of a value of $48,122.50 in exchange for 2,988 shares of his stock of that corporation, and Seth W. Herndon received $89,961.20 in cash in exchange for 993 shares of his stock therein.
After December 17, 1930, the outstanding capital stock of Bu-Vi-Bar was owned, 5,969 shares by Buell and 1,989 shares by Herndon.
On December 17, 1930, J. Garfield Buell and Seth W. Herndon used some of the cash respectively received by them from Bu-Vi-Bar as heretofore stated in the purchase of securities, which securities were purchased in the open market*847 and at market values at a total cost of $306,613.65.
On December 30, 1930, a special stockholders' meeting of petitioner was held and a plan of reorganization proposed, the capital stock of the corporation to be increased so as to be $200,000 divided into 2,000 shares of the par value of $100, the board of directors and officers to be authorized to do all things necessary to carry the plan of reorganization and increased capitalization into full force and effect.
On the same date, the directors of petitioner voted, unanimously, approval of the aforesaid proposed plan of reorganization. The plan of reorganization which was adopted provided:
* * * that Bu-Vi-Bar Petroleum Corporation merge and consolidate on December 30, 1930, with Portland Oil Company by transferring to Portland *766 Oil Company its sole asset, the contract with Continental Oil Company (including the interest accrued thereon) in exchange for an issue (in excess of the amount already outstanding) of $960,000 aggregate principal amount of Sixty-Year 6% Convertible Coupon Gold Bonds and 1440 shares of the capital stock of Portland Oil Company. Interest shall be payable on these Bonds only from the date*848 of their actual issue.
It is further proposed as a part of the same scheme of reorganization that, immediately upon receipt of these securities of Portland Oil Company, Bu-Vi-Bar Petroleum Corporation distribute the same ratably among the holders of the outstanding capital stock of Bu-Vi-Bar Petroleum Corporation in complete cancellation and redemption of all of its outstanding stock, and that Bu-Vi-Bar Petroleum Corporation thereupon liquidate.
On the same date, December 30, 1930, at a special meeting of the board of directors of Bu-Vi-Bar, the proposed plan of reorganization was unanimously adopted and the proper officers of the corporation were authorized to do all things necessary to carry the plan of reorganization into full force and effect.
Upon motion, duly seconded and unanimously carried, the board of directors approved the immediate dissolution of the corporation and authorized the officers to take all action necessary to immediately effect the dissolution. The directors:
FURTHER RESOLVED, That J. Garfield Buell, President of this corporation be and hereby is authorized to sign, seal and deliver in its name and behalf an assignment in such form as he shall deem*849 proper transferring to Portland Oil Company all of the rights of this corporation in respect of a contract executed by it and the said J. Garfield Buell as first parties and by Continental Oil Company as second party, dated December 16, 1929.
FURTHER RESOLVED, That J. Garfield Buell, President of this Corporation, be and hereby is authorized to sign, seal and deliver in its name and behalf such assignments, bond powers and stock powers as may be necessary to transfer to J. Garfield Buell three-fourths and to Seth W. Herndon one-fourth of all Sixty-Year 6% Convertible Coupon Gold Bonds and all shares of capital stock of Portland Oil Company acquired by this corporation pursuant to a Plan of Reorganization previously adopted by this Board.
It is stipulated and we find:
Pursuant to the action voted on December 30, 1930, and on the same date, Bu-Vi-Bar Petroleum Corporation assigned and transferred to petitioner, Portland Oil Company, its sole remaining asset, the aforesaid contract with Continental Oil Company dated December 16, 1929. In exchange for said contract, petitioner, Portland Oil Company, issued to and in the name of Bu-Vi-Bar Petroleum Corporation 1,440 shares of its*850 capital stock, and $960,000 principal amount of its bonds.
This transaction was treated as a non-taxable reorganization by Bu-Vi-Bar Petroleum Corporation on its Federal Income Tax Return for 1930. No gain was reported therefrom and no tax has been paid thereon or asserted by the respondent. If Bu-Vi-Bar Petroleum Corporation realized a taxable gain upon the exchange of said contract in 1930, the amount of gain thereon would have been $996,738.66 (being the $1,104,000 of securities received in exchange therefor less the excess of the amount of $153,378.11 referred to in paragraph 3 *767 hereof over the amount of $51,591.77 referred to in said paragraph, less the $5,475 accrued on said contract from December 1, 1930 to December 31, 1930 and reported by Bu-Vi-Bar Petroleum Corporation for taxation in 1930) and the additional tax thereon would have been $119,608.64.
At the time of receipt on December 30, 1930, by petitioner, Portland Oil Company, of the aforesaid Continental Oil Company contract, said contract obligated Continental Oil Company, a solvent corporation, to pay $1,095,000, with interest at 6% from December 1, 1930, payable in monthly installments pursuant to*851 said contract, but with privilege of anticipation of payments as provided therein.
* * *
On December 30, 1930 Bu-Vi-Bar Petroleum Corporation duly assigned 1,080 shares of petitioner's capital stock out of the said 1,440 shares of said stock to J. Garfield Buell and 360 shares thereof to Seth W. Herndon, and transferred to J. Garfield Buell $720,000.00 principal amount of Portland Oil Company bonds out of the said $960,000.00 principal amount of said bonds and $240,000.00 principal amount of said bonds to Seth W. Herndon. On the same day, and upon surrender of the certificate for said 1,440 shares issued in the name of Bu-Vi-Bar Petroleum Corporation, certificates for 1,080 shares of petitioner's capital stock were issued in the name of J. Garfield Buell and for 360 shares in the name of Seth W. Herndon. On the same date, December 30, 1930, $240,000 principal amount of petitioner's bonds, previously registered in the name of Bu-Vi-Bar Petroleum Corporation, were registered in the name of Seth W. Herndon, and $720,000 principal amount of petitioner's bonds, previously registered in the name of Bu-Vi-Bar Petroleum Corporation, were registered in the name of J. Garfield Buell.
*852 The transaction between Bu-Vi-Bar and the petitioner was treated by Bu-Vi-Bar and J. Garfield Buell and Seth W. Herndon as a nontaxable reorganization and no gain was reported by them on their income tax returns for 1930 as resulting from the transaction and no tax has been asserted by the respondent. On December 30, 1930, upon the acquisition of the contract with the Continental Oil Co., the only assets of the petitioner consisted of $368,300 in cash received under subscriptions heretofore described and the contract referred to, with accrued interest thereon of $5,660.43, and it had no liabilities other than the bonds issued as aforesaid, with accrued interest thereon of $1,713.23.
At the close of business on December 30, 1930, petitioner had a total of 1,923 shares of its capital stock and $1,280,000 principal amount of its bonds outstanding, registered in the names of the following owners:
| Name | Shares of stock | Bonds |
| Robinson Verrill | 1 | None |
| Donald W. Philbrick | 1 | None |
| Mildred J. McCarty | 1 | None |
| Mrs. Ethel P. Buell | 240 | $160,000 |
| Betty Jane Buell | 120 | 80,000 |
| Mrs. Gertrude Woods Herndon | 120 | $80,000 |
| J. Garfield Buell | 1,080 | 720,000 |
| Seth W. Herndon | 360 | 240,000 |
| Total | 1,923 | 1,280,000 |
*853 *768 On January 2, 1931, the stock held in names of the directors, said Philbrick, McCarty, and Verrill, one share each, was conveyed to Gertrude Woods Herndon, Ethel P. Buell, and Betty Jane Buell, respectively. On the same day Ethel P. Buell transferred one share of stock to George W. Treat of Boston, Massachusetts.
On January 2, 1931, all the original directors of petitioner resigned, and J. Garfield Buell, Seth W. Herndon, and George W. Treat were elected by proxies held by Donald W. Philbrick.
On January 5, 1931, J. Garfield Buell and Seth W. Herndon transferred to petitioner for a total consideration of $331,549 the securities acquired by them as aforesaid on December 17, 1930, being the then market value thereof. On the same date, January 5, 1931, J. Garfield Buell transferred to petitioner securities for $48,122.50, which securities J. Garfield Buell received from Bu-Vi-Bar on or about December 17, 1930, as heretofore set out.
On account of the gain arising from this transaction in 1931, Buell paid a Federal income tax of approximately $4,600 and Herndon paid a Federal income tax of approximately $1,200.
It is stipulated and we find:
On January 5, 1931 Seth*854 W. Herndon deposited said check of Portland Oil Company in the amount of $331,549 in his personal account in The First National Bank & Trust Company of Tulsa, Oklahoma, and on the same date, January 5, 1931, gave his personal check to J. Garfield Buell for $233,866.77. The latter amount represented J. Garfield Buell's share of the amount received for the aforesaid securities.
On the same day, January 5, 1931, J. Garfield Buell deposited the check from Seth W. Herndon in the amount of $233,866.77 and the check received from Portland Oil Company in the amount of $48,122.50, these checks aggregating $281,989.27, in his personal account at The First National Bank & Trust Company of Tulsa, Oklahoma.
On the same day, January 5, 1931, Seth W. Herndon gave his check in the amount of $92,460 to The First National Bank & Trust Company of Tulsa, Oklahoma, in payment of his note (together with interest thereon) of $92,000 given to said bank on December 6, 1930. On the same day, January 5, 1931, J. Garfield Buell gave his check in the amount of $277,380, to the First National Bank & Trust Company of Tulsa, Oklahoma, in payment of his note (together with interest thereon) of $276,000 given*855 to said bank on December 6, 1930.
On January 12, 1931, at a special meeting of the board of directors of petitioner, resignations of Philbrick, as president, and Mildred J. McCarty, as assistant treasurer, were accepted and J. Garfield Buell was elected president, B. H. McCoy, assistant treasurer, Seth W. Herndon, vice president, Coburn Herndon, secretary, and D. H. Moffat, assistant secretary.
During 1931 the Continental Oil Co. paid $1,095,000 and interest to petitioner, the Portland Oil Co., in pursuance of its right to anticipate payments and in full discharge of its obligations under said contract, on the following dates:
| Principal | Interest | |
| January 3, 1931 | $50,000 | $5,475 |
| January 30, 1931 | 50,000 | 5,225 |
| February 27, 1931 | 500,000 | 4,975 |
| March 31, 1931 | 495,000 | 2,475 |
| Total | 1,095,000 | 18,150 |
*769 The Continental Oil Co. gave the petitioner no advance notice of these payments.
The Continental Oil Co. contract, on December 30, 1930, had a fair market value of $1,095,000 and accrued interest. The bonds and shares of stock petitioner issued or exchanged therefor had then a fair market value of substantially the same amount.
The acquisition*856 of stock and securities in petitioner corporation by Bu-Vi-Bar, Ethel P. Buell, Gertrude Woods Herndon, and Betty Jane Buell in exchange for their property was as to each substantially in proportion to the interest of each in the property held by them prior to the exchange, and the acquisition of stock and securities by Bu-Vi-Bar and the women constituted only one transaction.
OPINION.
DISNEY: In order to dispose of the questions here presented, it is necessary first to determine whether the obligation of the Continental Oil Co. to pay $1,650,000, which was exchanged for corporate stock and securities of the petitioner, was an installment obligation under section 44 of the Revenue Act of 1928. 1 Petitioner argues that it *770 was not, that the sale of oil neases in 1929 by the Bu-Vi-Bar Petroleum Corporation was a transaction of sale fully taxable in that year, that the contract had a fair market value at that time of its principal amount, that full profit was recognized upon the sale in 1929, and that therefore the basis of the contract to taxpayer was the principal amount of the contract when acquired in 1929 by the Bu-Vi-Bar Petroleum Corporation.
*857 Assuming, without deciding, that the contract with Continental Oil Co. (providing for no initial payments in 1929 - and none being made in that year) would not be the basis of an installment obligation if completed in 1929, but would give petitioner a basis of the fair market value of the contract at that time, we must nevertheless decide which is the taxable year when the contract is completed, for if therein there are partial payments, the statute is obviously satisfied. The contract with the Continental Oil Co. was in consideration of payment and performance of certain "covenants and agreements to be kept and performed" by the parties, including payment of taxes, delivery of abstracts of title disclosing merchantable title free of liens and encumbrances, examination of such abstracts and correction or perfection within a reasonable time of defects found, payment of expenses of development and operation to January 1, 1930, including cost of certain tested items of equipment, and adjustment of inventory of personal property. The contract further provided for delivery of assignments to a named trustee, to be held until completion of payment and only then delivered. The stipulation*858 recites that the assignments were delivered to the Continental Oil Co. on December 17, 1929, and Buell testified that they were so delivered. Obviously, such a delivery prior to payment would have been contrary to the contract. It seems probable that the intent of the stipulation and testimony was that delivery was to the trustee in accordance with the contract; however, it is possible that the statements are literally correct, and we will so assume and find. Such delivery of assignments of itself, however, does not show a completed transaction in 1929 between the contracting parties. The other conditions above described may or may not have been completed in that year. Moreover, Buell specifically testified that the contract was effective as of January 1, 1930, that Bu-Vi-Bar operated the property until January 1, and turned the property over as of 7 a.m., January 1, had physical control until that time, that the operation continued until then under the contract, and that they delivered possession on January 1. Considering these facts, the treatment of the obligation by Bu-Vi-Bar as an installment matter, and the burden upon petitioner to demonstrate that the transaction was*859 completed in 1929, we are unable so to find. ; *771 and .
Moreover, sections 113(a)(7) and 113(a)(8) of the Revenue Act of 1928, 2 if applicable at all, provide that the basis (of the obligation from the Continental Oil Co.) "shall be the same as it would be in the hands of the transferor * * *" (increased or decreased as hereinafter discussed). The Bu-Vi-Bar Petroleum Corporation, the original owner of the obligation, had an election as to whether to return it for tax purposes as an installment obligation. It so elected and returned the obligation on an installment basis and paid taxes accordingly. It does not appear that it ever amended such return or asked a basis different than under the installment obligation theory. The law as to installment obligation gave the Bu-Vi-Bar Petroleum Corporation a certain basis. Under the above language of section 113(a)(7) and (8) of the statute, the basis provided by the installment obligation is the basis of the petitioner. *860 . We therefore conclude, both upon the factual showing made and the application of the statute, that it has not been shown that the obligation of the Continental Oil Co. was taxable in the year 1929, and conclude that it was an installment obligation as reported by Bu-Vi-Bar in 1930.
*861 Is the petitioner, then, entitled, for income tax purposes, to a "stepped-up" basis for an installment obligation acquired by it in return for its stock and bonds in a nontaxable exchange? The factual situation may be epitomized as follows: A corporation owned an installment obligation upon which it had reported and paid income tax upon installments received during one year. The two sole stockholders of the corporation furnished, one of his wife, and *772 the other to his wife and daughter, as gifts, money with which to purchase stock and securities in a new corporation (the petitioner). Pursuant to a plan primarily to minimize income taxes upon the receipt of the balance of the installment obligation, the first corporation exchanged the installment obligation to the new corporation for slightly less than 80 percent of its stock and securities (bonds) about three weeks after the wives and daughter had purchased, with the money furnished them, all (except qualifying shares) of the then authorized stock, which was slightly more than 20 percent of the stock and securities of the new corporation, after increase of capital stock and amount of securities. The stock and bonds*862 acquired by the old corporation and the wives and daughter, were substantially in proportion to the property transferred (including the cash contributed by the two wives and the daughter). The old corporation was then dissolved and the stock and bonds received by it from the new corporation poration distributed in liquidation to the two stockholders of the old corporation. Both the old corporation and its stockholders reported no income therefrom, and none was asserted by respondent.
Although earlier contending that the stock and securities purchased by the wives and daughter with cash furnished by the husbands, the stockholders of the old corporation, were controlled by the husbands, the respondent apparently has abandoned that theory, and there seems no issue now between the parties in that regard. At any rate, in view of the conclusion reached by us, it is immaterial whether there was such control. We assume the reality and validity of the gifts to the wives and daughter.
The questions then arising are: (1) Whether the acquisition of stock and securities in the new corporation for cash by the wives and daughter, and by exchange of the installment obligation of the old*863 corporation, constitute a single transaction so that more than 80 per cent control of the property remained in the transferors under section 113(a)(7) of the Revenue Act of 1928 and whether under section 113(a)(8), together with section 112(b)(5) of the same act, the new corporation was controlled by the transferors, so that the basis of the property, the installment obligation, would be the same in the hands of the new corporation as in the hands of the old; and (2) whether in case of such control by the transferors, the fact that the property transferred was an installment obligation gives it an increased base under section 44(d) of the Revenue Act of 1928.
That the transfers herein involved were in connection with a reorganization can hardly be doubted. Both the old corporation and its stockholders and the respondent treated the matters as constituting reorganization, with no recognition of gain or loss. The old corporation was merged in the new, its sole and only property passing *773 to the new corporation. The "Plan of reorganization", approved and adopted by both corporations, expressly provided that Bu-Vi-Bar "merge and consolidate" with petitioner by transferring*864 to petitioner its sole asset, the Continental Oil Co. contract. A similar situation was treated as reorganization in , and section 113(a)(7) of the Revenue Act of 1928 applied. The cash with which the wives of the two stockholders and the daughter acquired stock and bonds in the new corporation constituted property within the purview of section 113(a)(7). ; and . Therefore, although the daughter and the two wives had acquired slightly more than 20 percent of the bonds and stock of the new corporation, property was conveyed by the transferors as a whole, including Bu-Vi-Bar Petroleum Corporation, for more than 80 percent control of the new corporation. Is the acquisition of stock and securities in the new corporation by the old corporation, the wives and daughter, to be considered a single transaction? The question as to whether the transfers constitute one transaction is one of fact. *865 ; . That the avoidance of taxes was the prime object of the whole transaction, and gifts to wives and daughter and reorganization of business secondary, appears throughout the record. The attorney for Buell and Herndon told them that the gifts must be more than 20 percent. They had to give more than 20 percent. "The problem of taxation" is the first element mentioned by Buell when asked about his first consultation of counsel and the purpose thereof. Herndon, one of the husbands, testified: "Well, the plan is exactly what has been done. * * * Yes, the plan was exactly what was done." Again, he testified that the attorney presented a plan or procedure which was essentially the plan that has since been carried out, a plan that there would be a stepped-up value of the Continental Oil Co. contract, and the Portland Oil Co. would not pay tax on that money.
Moreover, to fail to see that there was a mutual understanding and agreement between the two husbands, sole stockholders of, and acting for, the old corporation, and their wives and the daughter would be to close our*866 eyes to actualities, and to resign our function as examiners of fact. Although each party would not, in terms, state that there was agreement, such agreement nevertheless plainly appears. Buell testified that the wives and daughter were to purchase the securities (of petitioner) if they saw fit, and that "we had reason to believe they would"; that the plan as worked out by the attorney contemplated all of those things (referring specifically *774 to the gifts to wives and daughter, formation of petitioner, purchase of securities by wives and daughter, and turning over of the Continental Oil Co. contract to petitioner); asked if his wife and daughter agreed to use the money given for purchase of stock and bonds of petitioner, he "wouldn't say it was understood" but that he suggested it to them and he "naturally got the impression they were going to do it." Herndon stated that the plan included purchase of stocks and bonds by Gertrude Woods Herndon, Ethel P. Buell, and Betty Jane Buell with the proceeds of the money given them, that it was necessary that they but "at least a certain amount of securities", that he told Gertrude Woods Herndon the attorney's plan, including her*867 purchase of securities with the money, and she thought the plan was satisfactory and the securities were going to appeal to her; she said she intended to do it (buy the securities). Mrs. Buell, asked whether she agreed to Buell's suggestion about the money (the gift to her) being put in the Portland Oil Co., answered: "I didn't agree, but I said I would be willing." The Buell daughter, fifteen years of age, was advised by her father about the plan. He suggested that she invest in the Portland Oil Co., and she told him she thought it was a very good idea and that she would like to. She relied on her father's advice. The mutual understanding is emphasized in the fact that the check by Betty Jane Buell is dated December 3, while the money it represented was not borrowed by her father from the bank until December 6. Such "attenuated subtleties" as contentions that there was not agreement between these parties covering this whole plan do not appeal. The two sole stockholders, Buell and Herndon, represented their corporation, Bu-Vi-Bar. *868 ; ; and . Under these circumstances we hold that the acquisition of the stock and bonds of the new corporation by all of the transferors was one transaction, pursuant to one plan, purpose and understanding, that of acquiring a stepped-up basis for the Continental Oil Co. obligation, not separable into parts for income tax purposes. ; certiorari denied, ; ; ; ; ; . Petitioner points out that the acquisition of stock and bonds by the women was some three weeks earlier than the acquisition of stock and bonds by Bu-Vi-Bar and its stockholders. *869 The difference in time is, of course, in logic, to be considered, but does not control or of itself demonstrate separateness *775 of transactions. No showing is made of any business transacted by petitioner corporation in the interim. In , two days elapsed; In , the time elapsed was several weeks, yet in both cases the transactions were considered as an integer; and , was reversed and remanded, , in order for the Board to determine the intent and purpose of the transferors as to whether they were in furtherance of the plan of reorganization. In the instant case, as observed above, the unity of plan and agreement is obvious. Under such circumstances the lapse of time is seen as of no consequence.
Petitioner contends, however, that if we assume that the matters above described constitute a single transaction, nevertheless the "property" referred to in section 113(a)(7) of which 80 percent interest or control must subsist in the same persons after the transfer, refers to the individual transferor*870 and his own separate property contributed to the transfer; and that therefore, since Bu-Vi-Bar was the owner, exclusive of the women of the Continental Oil Co. contract, before the transfer, but that after transfer neither Bu-Vi-Bar nor its stockholders had so much as 80 percent control of the new corporation and therefore of the property, then section 113(a)(7) can not be applied. This view has been repudiated definitely in the following cases and need not be further discussed: ; affirmed sub nom. ; certiorari denied, ; citing (affirming ); Real Estate-Land Title & Trust Co. v.United States, (Not reported.) . These cases hold that the property of the transferors, considered together, and not the property of an individual transferor, is considered in computing the 80 percent control or interest within the*871 intendment of the statute. It therefore follows under section 113(a)(7) of the Revenue Act of 1928 that the basis for the installment obligation is the same in the hands of the petitioner, Portland Oil Co., as in the hands of the transferors, increased in the amount of gain (or decreased in the amount of loss) recognized to the transferors upon the transfer.
The same result follows when section 13(a)(8) of the Revenue Act of 1928 is considered, since we find that the transferors of the property acquired control of petitioner corporation substantially in proportion to their holdings of the property prior to the transfer within the language of section 112(b)(5). Under section 113(a)(8), of course, it is immaterial whether there is 80 percent control *776 of the particular property being considered by the former owners, and transferors, of that particular property.
Petitioner argues that section 112(b)(5), and therefore section 113(a)(8), can have no application because upon the completion of the transfer the Bu-Vi-Bar Petroleum Corporation owned no securities in taxpayer corporation. *872 The transfer of stock and securities from the petitioner corporation was made to the Bu-Vi-Bar Petroleum Corporation and by it they were distributed to its stockholders. Immediately after the transfer, the transferors were in control of the transferee corporation.
Petitioner next, in the alternative, contends, however, that, assuming the applicability of section 113(a)(7) and (8), since such sections specifically give the property in the hands of the transferee a base consisting of the original base plus the amount of gain recognized to the transferor in the transfer, under section 44(d) of the Revenue Act of 1928 gain was recognized to the full extent of the balance due under the installment contract (less the original base as adjusted by application of payments already made) and that therefore the petitioner under either section 113(a)(7) or section 113(a)(8) has the benefit of a basis increased by such recognized gain.
We can not assent to such a view. It misconceives the object of the whole revenue law as to nonrecognition of gain or loss in connection with reorganization matters. No such exception is indicated by the general law*873 on the subject and petitioner is logically under a burden of demonstrating such exception. It is necessary, to agree with such view, to say that the provisions affording relief from present taxation to those reorganizing their business organizations, and deferring such taxation to the future, permit, not deferring, but the complete escape of tax, in case an installment obligation is transferred in connection with the reorganization under circumstances constituting a nontaxable exchange. Not only is it inconceivable that such could have been the intent of the statute, but examination of the report of the Senate Committee on Finance, May 1, 1928, as to section 44, covering installment sales, shows that it closes by saying:
Whether or not the gain or loss realized under the section is recognized for tax purposes, depends upon general principles of law embodied in the income tax provisions, the exchange of installment obligations in connection with tax-free exchanges, for instance, being cared for by section 112.
Section 112 being the section as to recognition of gain or loss, it is apparent that the above language can only mean that the exchange of installment obligations in connection*874 with the tax-free exchanges is subject to general law as to recognition of gain or loss - *777 in other words, is not to be excepted from the application of section 112 as to recognition or section 113 as to the basis for determining gain or loss. The "general principles of law embodied in the income tax provisions" can not be applied, as above suggested by the Senate Committee, without reaching that conclusion. Obviously in consonance with the above Committee report, article 355 of Regulations 74, covering installment payments, reads:
The entire amount of gain or loss resulting from the disposition or satisfaction of installment obligations shall be recognized except as provided in section 112 and articles 571-580.
Moreover, petitioner errs in contending that section 44(d) recognizes gain upon exchange of installment obligations. That section merely states (so far as the facts herein concerned are involved) that in case of an exchange of an installment obligation "gain or loss shall result" - to the extent of the difference between the base and "the amount realized." The mere fact that gain "results" would not require recognition thereof. *875 Section 113(a)(7) and section 113(a)(8) in terms add to the original basis the amount of gain "recognized." Recognition depends upon section 112 - as expressly indicated by the Senate Committee as above seen. Section 112 does not recognize gain in case of transfer for stock or securities of a corporation controlled by transferor or transferors proportionately to property previously held, nor in case of exchange of property by a corporation in pursuance of a plan of reorganization solely for stock or securities in another corporation a party to reorganization. It thus appears that not only within the language of the statutes, but also within the view of the Senate Committee, there is not, in the situation here at hand, the recognition of gain which, upon the theory of the petitioner, is necessary in the language of section 113(a)(7) and section 113(a)(8) to give the increased base desired by petitioner. The expression "increased in the amount of gain" used in sections 113(a)(7) and 113(a)(8) refers to taxable gain. ; certiorari denied, *876 , affirming . We conclude that petitioner's alternative contention is not well founded, and that section 44(d) can not be relied upon to add to the original basis of the property transferred.
We therefore hold that the basis for amounts collected in 1931 by the petitioner on the installment obligation is the original cost basis, adjusted only to that portion thereof applied against collections made in 1930. The parties having stipulated that the amount of the deficiency determined by the Commissioner is correct, if petitioner is subject to tax in 1931 on the excess of the amounts collected by it in that year under the Continental Oil Co. contract over the *778 portion of the basis not used by the Bu-Vi-Bar Petroleum Corporation on its 1930 return, we hold that such deficiency so determined by the respondent is correct. The respondent having in effect abandoned his contentions as to fraud penalty, no fraud penalty is allowed.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. SEC. 44. INSTALLMENT BASIS.
(a) Dealers in personal property. - Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.
(b) Sales of realty and casual sales of personalty. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 40 per centum of the selling price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above perscribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.
(c) Change from accrual to installment basis. - If a taxpayer entitled to the benefits of subsection (a) elects for and taxable year to report his net income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.
(d) Gain or loss upon disposition of installment obligations.↩ - If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange - the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange - the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis ofthe obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.
2. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in he hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer;
(8) SAME - CORPORATION CONTROLLED BY TRANSFEROR. - If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) (including also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. ↩