*3770 A disposition of stock under the circumstances of this appeal held to have been a sale under the provisions of section 202(a) of the Revenue Act of 1918 and not an exchange of stock for stock under the provisions of section 202(b) of that Act. Held, further, that the fair market value of the right to subscribe for stock of another corporation received as a part of the consideration for the stock sold should be included in determining the gain or loss upon such sale.
*557 The Commissioner determined a deficiency of $1,446.76 in respect of the tax of James F. Shea for the calendar year 1919 and a deficiency of $323.78 in respect of the tax of Howard Moran for the *558 calendary year 1919. The proceedings were consolidated for hearing and decision.
Petitioners claimed in the petition that the Commissioner erred in holding that the acquisition by the American Security & Trust Co. of certain stock owned by them in the Home Savings Bank, when the latter institution merged with the Trust Company, was an*3771 exchange of stock for stock under section 202(b) of the Revenue Act of 1918. They claimed that the transaction was a sale by them of their stock to the Trust Company for $400 a share.
Prior to the hearing of these proceedings, the Board decided the proceedings of , wherein it was held that under the contract between the Home Savings Bank, its stockholders, and the American Security & Trust Co. the transaction, wherein the Trust Company acquired the stock of the Home Savings Bank, was a sale by the stockholders of their stock and that the fair market value of the right of the sellers of the Home Savings Bank stock to subscribe for four shares of stock of the Trust Company for each share of bank stock held by them at $100 a share was a part of the consideration for the sale of the bank stock and should be included in computing the profit derived from such sale. The Commissioner amended his answer in these proceedings and admitted error in his original determination holding that the transaction was an exchange of stock for stock and alleged that it was a sale and that the profit derived by these petitioners from such sale should be*3772 determined in accordance with the Board's decision in There is little dispute as to the facts in these proceedings, but these petitioners claim that the Board's decision in the Saul case is erroneous insofar as it holds that more than $400 cash received from the American Security & Trust Co. should be considered in computing the profit upon the sale by them of their stock in the Home Savings Bank.
FINDINGS OF FACT.
Petitioners are residents of the District of Columbia.
At the time of the agreement of March 18, 1919, and other transactions hereinafter mentioned, Howard Moran was the owner of 10 shares of the capital stock of the Home Savings Bank, 5 shares of which were acquired prior to March 1, 1913, and, on that date, said 5 shares had a fair market value of $325 a share, which was higher than cost. The remaining 5 shares were acquired by him in 1919 at a cost of $460 a share.
James F. Shea was the owner of 29 shares of the capital stock of the Home Savings Bank, all of which were acquired prior to March 1, 1913, and on that date had a fair market value of $325 a share, which was higher than cost.
*559 Each of*3773 the petitioners in his return for the year 1919 reported as profit the difference between the cost of March 1, 1913, value of the Home Savings Bank stock, which is not in dispute, and $400 a share, the amount of cash received by them from the American Security & Trust Co. The transaction, hereinafter described in detail, was one in which these petitioners deposited their stock with trustees to whom the Trust Company, pursuant to the terms of a written contract, paid $400,000, which amount was used by the trustees pursuant to the provisions of the contract in the purchase of 4,000 shares of the capital stock of the Trust Company at par, which they distributed to the taxpayers on the basis of four shares for each share formerly owned by them in the Home Savings Bank.
The Commissioner held that in substance the transaction was an exchange of stock for stock within the meaning of section 202(b) of the Revenue Act of 1918 and computed the profit accordingly.
B. F. Saul, president of the Home Savings Bank, hereinafter referred to as the Bank, was approached early in 1919 by the president of the American Security & Trust Co., hereinafter referred to as the Trust Company, with a proposal*3774 to merge the Bank with the Trust Company. This proposal was considered and discussed by the directors of the Bank and negotiations followed which resulted in an offer by the Trust Company to take over the assets of the Bank in consideration of the assumption by the Trust Company of the Bank's liabilities, other than its liability to its stockholders, which the Trust Company agreed to satisfy by payment to the stockholders of $400,000 and to permit the stockholders of the Bank to subscribe at par for four shares of its stock for each share of Bank stock owned by them.
The Bank had an authorized and outstanding capital stock of $100,000, consisting of 1,000 shares which were owned by less than 50 stockholders. The offer of the Trust Company was made known to each stockholder of the Bank, who was advised that under the proposed arrangement he would be paid cash for his stock at the rate of $400 a share, or, if he so desired, he would be permitted, upon the payment by the Trust Company of the $400 a share, to purchase at par four shares of Trust Company stock for each share of Bank stock owned. Each stockholder evidenced a desire to acquire the Trust Company stock. Thereafter, on*3775 March 18, 1919, a formal written agreement was entered into between the Bank, the Bank stockholders, and the Trust Company, as follows:
THIS AGREEMENT, made this 18th day of March, A.D. 1919, by and between the stockholders of the Home Savings Bank, hereinafter referred to as the Stockholders; the Home Savings Bank, a corporation, hereinafter referred to as the Bank; B. Francis Saul, James F. Shea and Howard Moran, as Trustees, *560 hereinafter referred to as the Trustees, and the American Security and Trust Company, hereinafter referred to as the Trust Company; witnesseth:
1. The Stockholders hereby agree as follows:
(a) To deposit with the Trustees hereinbefore named at the time of the signing of this contract, certificates of stock in the Bank then owned by them, assigned in blank to said trustees.
(b) To execute a proxy to the said Trustees to vote the stock so deposited by them at any subsequent meeting of the Stockholders which may be specially called to consider the question of the merger of the Bank and the Trust Company, therein expressly waiving notice of any such meeting, and authorizing said Trustees at such meeting to vote to authorize the Directors of*3776 the Bank to pass such resolutions as may be necessary to effect said merger by the transfer of the assets of the Bank, including all of its real and personal property, to the Trust Company.
(c) To authorize said trustees to hold the stock of the Bank so deposited with said Trustees until the delivery to the Trustees by the Trust Company of four thousand (4,000) shares of its capital stock and then to hold the stock of the Bank subject to the direction of the Trust Company.
2. The Bank hereby agrees to call a special meeting of the Stockholders of the Bank for the purposes hereinbefore indicated, and, upon being directed by the Stockholders, to call a special meeting of the Board of Directors, to authorize the transfer of all the assets of the Bank to the Trust Company for and in consideration of the assumption by the Trust Company of all the liabilities of the Bank, other than its liabilities to its stockholders, and for and in consideration of the satisfaction of the interest of its stockholders by the payment of the sum of Four Hundred Thousand ($400,000) Dollars to the Trustees.
3. The said Trustees hereby agree that after said stock of the Bank shall have been delivered*3777 to them and after the authorization of the stockholders and Board of Directors of the Bank for the transfer of its assets to said Trust Company and receipt by said Trustees of said sum of Four Hundred Thousand ($400,000) Dollars, and upon delivery by said Trust Company of four thousand (4,000) shares of its capital stock to them, they will pay to the Trust Company for said stock the sum of Four Hundred Thousand ($400,000) Dollars and will hold the stock of the Bank subject to the direction of the Trust Company, and then will thereupon transfer to each stockholder of the Bank four shares of the stock of the Trust Company for each one share of the stock of the Bank delivered by such stockholder.
4. The Trust Company hereby agrees to call a special meeting of the stockholders of said Company for the purpose of increasing its capital stock from Three Million to Three Million Four Hundred Thousand ($3,400,000) Dollars. If the said increase is authorized by the stockholders, a special meeting of the Board of Directors will then be called for the purpose of the issuance of the four thousand (4000) shares of stock authorized to be issued by the stockholders, and for the purpose of authorizing*3778 and directing the merger of the Bank and the Trust Company by the transfer of the assets of the Bank to the Trust Company and the assumption by the Trust Company of all the debts and liabilities of the Bank other than liabilities to the stockholders of the Bank, and of the payment of the sum of Four Hundred Thousand ($400,000) Dollars to the Trustees for the Stockholders, and for the purpose of authorizing the transfer of four thousand (4000) shares of the capital stock of the Trust Company issued as aforesaid to said Trustees for the sum of Four Hundred Thousand ($400,000) Dollars.
* * *
This *561 agreement was signed by all the stockholders of the Bank, for the Bank by its president, by the trustees for the Bank's stockholders, and by the Trust Company. Its terms were dictated with the intent and for the purpose of complying with and meeting the requirements of the law of the District of Columbia regulating the issuing of stock by trust companies organized thereunder.
The fair market value of the stock of the Trust Company on March 18, 1919, was $220 a share.
On April 14, 1919, a meeting of the directors of the Trust Company was held at which a resolution was adopted, *3779 the pertinent portions of which were as follows:
RESOLVED, That it is the unanimous judgment of the Board that the merger of this Company with the Home Savings Bank in the manner and form provided in the proposed agreement between the stockholders of the Home Savings Bank, the trustees named in said agreement, and this Company, which said proposed agreement has been submitted to this Board by its Executive Committee, will be of great benefit to this Company, and ought, in the best interests of this Company, to be executed;
RESOLVED, That the officers of the Company be, and they hereby are authorized and directed to execute said agreement on behalf of this Company;
RESOLVED, further, that * * * a special meeting of the stockholders is hereby directed to be called * * * on the 14th day of April, 1919, * * * to consider a proposal to increase the capital stock of this Company from three million dollars to three million four hundred thousand dollars with the object and for the purposes stated in the proposed agreement above set forth; to consider and, if in the judgment of the stockholders such action ought to be taken, to approve and ratify the agreement dated the 18th day of March, *3780 1919, above set forth, executed by the officers of the Company, pursuant to the direction contained in these resolutions; and further to consider and adopt such other and further resolutions as may be desirable or expedient in effecting the object and purposes of said agreement; * * *
On April 15, 1919, a meeting of the stockholders of the Trust Company was held for the purpose of considering the agreement hereinbefore mentioned and the action of the board of directors relative thereto. At this meeting the stockholders approved and ratified the action of the board of directors and the following resolution was adopted:
* * * RESOLVED, that in order to provide capital in amount sufficient and proper to carry into effect the agreement signed on the 18th day of March, 1919, by the stockholders of the Home Savings Bank, the Home Savings Bank, B. Francis Saul, James F. Shea, and Howard Moran, as trustees, and the American Security & Trust Company, that the capital stock of this company be increased from its present amount of three million dollars ($3,000,000) to three million four hundred thousand dollars ($3,400,000), said increase to consist of four thousand (4000) shares of the par*3781 value of $100 each.
RESOLVED, that the stockholders of this Company do hereby authorize the said increase in the capital stock of this Company from three million dollars, consisting of thirty thousand shares of the par value of $100 each to three million *562 four hundred thousand dollars, consisting of thirty four thousand shares of the par value of $100 each.
RESOLVED, that the said four thousand shares of stock when issued shall be issued to the trustees named in the above mentioned agreement to carry out the object and purposes of said agreement, upon the payment to this Company of the sum of four hundred thousand dollars ($400,000).
* * *
The stock of the Bank was not quoted on any stock exchange. The bid price for this stock on the Washington Stock Exchange was $420 a share for 10 shares in January 1919, and during the period from January to March 28, 1919, there were offers made through the Washington Stock Exchange to purchase the Bank stock at $420 a share. Between the date of the Trust Company's offer to acquire the assets and stock of the Bank and before the transaction was consummated the vice president of the Bank purchased from the Bank's president*3782 five shares of stock at $460 a share.
Between January 10 and April 16, 1919, the following sales of the Trust Company's stock were made on the Washington Stock Exchange:
| 1919 | Shares sold | Price per share |
| Jan. 10 | 10 | $221 |
| Jan. 20 | 15 | 222 |
| Feb. 8 | 20 | 222 |
| Mar. 13 | 10 | 221 |
| Mar. 15 | 8 | 220 |
| Mar. 24 | 10 | 233 |
| Mar. 26 | 10 | $233 |
| Mar. 28 | 12 | 234 |
| Mar. 28 | 6 | 234 |
| Apr. 1 | 2 | 236 |
| Apr. 16 | 5 | 237 |
On May 10, 1919, the Trust Company's stock sold for $239 a share. On May 15, 5 shares were sold at $240; on June 5, 10 shares at $243; and on June 10, 2 shares at $239.
The terms of the agreement were carried out and the transaction, as consummated at the close of business on April 19, 1919, was executed in detail as follows:
The transfer, assignment, and conveyance of all the assets of the Bank to the Trust Company, the assumption by the Trust Company of the Bank's liabilities, the issuance to and the receipt by the trustees on behalf of the stockholders of the Bank of a check issued by the Trust Company for $400,000, the delivery to the Trust Company of the 1,000 shares of the Bank stock by the trustees, the deposit by the trustees of the check for $400,000 in*3783 the Riggs National Bank to the credit of their account, the drawing of a check on this account by the trustees for $400,000 payable to the Trust Company, and the issuance and delivery by the Trust Company to the trustees for the stockholders of the Bank of a certificate for 4,000 shares of the Trust Company stock, the same being endorsed by the trustees and returned to the Trust Company with instructions to issue certificates *563 to each of the former stockholders of the Bank. Pursuant thereto, each of the former stockholders of the Bank received a certificate for four shares of Trust Company stock for each share of Bank stock formerly owned by him.
It was necessary for the Trust Company, being a District of Columbia corporation, to obtain a certificate from the Comptroller of the Currency that its increased capital stock of $400,000 had been paid in. In a letter dated April 21, 1919, the Trust Company notified the Comptroller of the authorization and issuance of the $400,000 increased capital stock, and furnished him with a copy of the minutes of the meeting of its stockholders held April 14, 1919, in which was incorporated in full the agreement of March 18, 1919. On*3784 April 22, 1919, the Comptroller of the Currency issued a certificate that the $400,000 of stock had been issued as required by law, as follows:
WHEREAS, satisfactory evidence has been transmitted to the Comptroller of the Currency that the capital stock of the American Security and Trust Company, located in the City of Washington, District of Columbia, has been increased in the sum of Four Hundred Thousand Dollars ($400,000), pursuant to the provisions of the Code of Law of the District of Columbia, and that the whole amount of such increase has been paid in, and that the paid-up capital stock of said company now amounts to the sum of Three Million Four Hundred Thousand Dollars ($3,400,000);
Now, it is hereby certified, that the capital stock of the American Security and Trust Company has been increased in the sum of Four Hundred Thousand Dollars ($400,000); that said increase of capital has been paid in as a part of the capital stock; and that the said increase of capital is approved by the Acting Comptroller of the Currency.
In witness whereof, I hereunto affix my official signature and seal of office.
Each of the stockholders determined the profit or loss upon the sale*3785 of the Bank stock as the difference between the cost, or March 1, 1913, value thereof, and the sales price of $400 a share. The Commissioner in his original determination held that the transaction was an exchange of stock for stock within the meaning of section 202(b) of the Revenue Act of 1918 and determined the fair market value of the Trust Company's stock to have been $235 a share, resulting in the deficiency hereinbefore mentioned. By amendment to his answer to the petitions herein the Commissioner now claims, in accordance with the Board's decision in the proceedings of , the transfer by petitioners of their stock to the American Security & Trust Co. was a sale and that the profit upon the transaction should be computed by including as the consideration received for the bank stock $400 a share, cash received, plus $120, the fair market value of the right to subscribe to four shares of the Trust Company's stock at $100 a share for each share of bank stock sold, making the total consideration received by the petitioners for each share of Home Savings Bank stock $880 a share.
*564 OPINION.
*3786 LITTLETON: The facts in these proceedings are the same as the facts before the Board in the proceeding of B. F. Saul et al., decided by the Board and reported in , and from which facts we have found that the fair market value of the right of petitioners to subscribe for four shares of the Trust Company's stock for each share of bank stock sold by them to the Trust Company at the time of the transaction was $120 a share. In , the Board said:
Although the Board is of the opinion that this transaction was a sale of stock by these taxpayers, it is not convinced that the profit realized by the stockholders of the Bank was the difference between the cost, or March 1, 1913, value of their stock, and $400 a share. Under the terms of the agreement hereinbefore referred to, the Bank transferred its business and assets to the Trust Company in consideration of the assumption by the Trust Company of the Bank's liabilities other than its liability to stockholders. Under this contract the consideration passing from the Trust Company to each Bank stockholder for his Bank stock was $400 a share and the right to subscribe for*3787 four shares of the Trust Company stock at $100 a share. Between January 1, 1919, and March 18, 1919, the Trust Company's stock was selling on the market at prices ranging from $220 a share to $222 a share. Between March 24 and June 10, 1919, the stock of the Trust Company was sold on the exchange at prices ranging from $233 a share to $243 a share. The right of each Bank stockholder to purchase four shares of the Trust Company's stock at $100 a share was a part of the consideration which the Trust Company agreed to pay for the Bank's stock, and the value of that right should be considered in measuring the profit realized by the Bank stockholders to the same extent as if it had been cash. The amount received by the Bank stockholders for their stock was, therefore, $400 a share, plus the value of the right to subscribe for four shares of the Trust Company's stock at par.
Under the provisions of the contract and under all of the evidence submitted, the Board is of the opinion that the fair market price on value of the right received by each Bank stockholder to subscribe to the Trust Company's stock at par was $120 a share. The result therefore is that the price received by each*3788 Bank stockholder for each share of Bank stock sold was $400, plus $480, the value of the right to subscribe for four shares of the Trust Company's stock, or $880 a share. This amount, less the cost or March 1, 1913, value of the Bank stock, which is not in dispute, is the proper measure of the profit per share of the Bank stock to each of these taxpayers.
These petitioners contend that the Board was correct in its opinion in the Saul case in holding that the transaction involved was a sale by the stockholders of the Bank of their stock to the Trust Company, but that the fair market value of the right of the Bank stockholders to subscribe for four shares of stock of the Trust Company for each share of the Bank stock sold should not have been considered in determining the profit to the Bank stockholders upon the sale of their stock to the Trust Company. The Board has considered the argument *565 of counsel upon this point but can not agree with the claim advanced in these proceedings.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.