*1789 Petitioner, on account of conditions over which it had no control, was impelled to surrender, without consideration, one-half of its holding in stock of another corporation. Held that it is entitled to take the amount of the cost of the stock surrendered as a deduction from gross income.
*800 This proceeding is for the redetermination of deficiencies in income tax as follows:
| For the fiscal year 1923 | $1,302.62 |
| For the fiscal year 1924 | 266.06 |
| For the fiscal year 1925 | 5,061.29 |
There were two assignments of error. The first assignment relative to the inclusion by the Commissioner in gross income of $4,461.88, was conceded by the respondent at the hearing. The second assignment of error is as follows:
The respondent erred in that he failed to allow as a deduction from the petitioner's gross income for the fiscal year ended June 30, 1925, a loss of $12,500 sustained by it on the disposal of 32 1/2 shares of stock of a corporation other than the petitioner.
FINDINGS OF FACT.
Petitioner is an Indiana*1790 corporation with its principal office in Indianapolis.
In 1920 Richard Croker and his wife, Bula Croker, of New York, owned about two miles of ocean frontage at Palm Beach, Fla. In 1920 Croker and his wife entered into a contract with J. B. McDonald, *801 by the terms of which Croker and his wife constituted and appointed said McDonald their agent to sell said lands in lots for a term of five years, with right of renewal under certain specified conditions for another five years, and with stipulations that in the sale of said lots, there should be paid to the Crokers $150 per front foot, net to them, and that all amounts obtained by McDonald in excess of said $150 per front foot should belong to McDonald. The contract also contained option provisions, by which McDonald had the option at any time, during the ten-year period, to purchase said land, or such part thereof as then remained unsold, at $150 per front foot. Thereafter, in October, 1920, McDonald entered into a contract with Ewing Graham, E. D. Anthony, and A. P. Anthony, by the terms of which contract McDonald, in consideration of certain advancements made by Graham and the Anthonys, conveyed to each of them a one-fourth*1791 interest in said contract rights, McDonald as a real estate broker retaining the exclusive sales agency. The contract also provided that a corporation should at once be organized to take over the said lands, under the terms and conditions contained in the Croker contract, as well as the contract between themselves.
Thereupon Palm Beach Estates, Inc., a Florida corporation, was organized, and the said lands and contract rights and obligations were assigned to it. Soon after the organization of the above-named corporation, and the assignment to it of the said lands under those contracts, Croker died, and the whole situation became involved in litigation in a three-cornered contest in the courts. Children of Croker by a former marriage challenged his right to make the original contract. Mrs. Croker contended that the contract between herself and Mr. Croker on the one part, and McDonald on the other part, was a personal contract, and was not assignable to a corporation. The suit filed by the Croker children was decided against their contentions. The suit filed by Mrs. Croker was decided by the lower court in favor of the Palm Beach Estates, Inc., but is now pending in the Supreme*1792 Court of Florida.
Petitioner, the City Builders Finance Co., and another corporation, known as the City Builders Realty Co., are Indiana corporations with personnel of stockholders practically identical. Both of said corporations operated in Florida and became acquainted with the Croker-McDonald contract as well as its several mutations. McDonald succeeded in getting the City Builders Finance Co. and the City Builders Realty Co. interested in the Palm Beach Estates, Inc., project, and as a result they purchased a one-fourth interest in the Palm Beach Estates, Inc., for $50,000, one-half of which purchase *802 price was paid in cash by petitioner, for a one-eighth interest. The total number of shares of stock of the Palm Beach Estates, Inc., at that time, was 260, and petitioner became the owner and received 32 1/2 shares, paying $25,000 therefor on May 26, 1923.
On October 9, 1924, the litigation hereinbefore referred to reached a point where it became necessary to raise and deposit in court $529,000 in cash. None of the stockholders of the Palm Beach Estates, Inc., was prepared to furnish that money and McDonald and his associates opened negotiations with a Phipps*1793 Co., known as the Palm Beach Co., to obtain a loan of the necessary amount of money. As a result of such negotiations, the Phipps Co. and the Palm Beach Estates, Inc., entered into a contract, with the result that the Phipps Co. furnished the cash, $529,000, which was deposited in court to await final decision and orders of the court in the suit brought by Mrs. Croker.
The Phipps Co. furnished that money as a loan under the contractual terms and conditions that the money should be deposited in court and remain so deposited until final decree be obtained, and in the event Mrs. Croker finally won the case, in effect canceling the assignment to the corporation, that said money should be returned to the Phipps Co. and the Phipps Co. contract of loan canceled.
One of the conditions of that loan contract was that 50 per cent of the stock of the Palm Beach Estates, Inc., should be deposited in escrow pending said litigation, and on termination thereof, should be assigned and transferred to the Phipps Co. For special reasons, the Phipps Co. did not desire to take an immediate transfer of said stock and thereby become involved in said litigation. However, under the terms of that contract, *1794 that stock was to be eventually transferred to the Phipps Co., regardless of the outcome of the litigation, and regardless of whether or not the money was returned to the Phipps Co.
In order to effectuate all the incidents with reference to the deal for the Phipps loan, it became necessary for the Palm Beach Estates, Inc., to declare and issue an 100 per cent stock dividend, which was done, and the whole of such stock dividend was placed in escrow. It may be mentioned that the Phipps Co., prior to the declaration of the stock dividend, owned about 9 per cent of the stock of the Palm Beach Estates, Inc. The stock holdings in the Palm Beach Estates, Inc., before and after that stock dividend transaction, were as follows:
| Prior to stock dividend | After stock dividend | |||||
| Stockholder | Shares | Per | Shares | Per | Shares | Per |
| cent | cent | cent | ||||
| of | of | of | ||||
| total | total | total | ||||
| City Builders | ||||||
| Realty Co | 32.5 | 12.5 | 65.00 | 12.5 | 32.5 | 6.25 |
| City Builders | ||||||
| Finance Co | 32.5 | 12.5 | 65.00 | 12.5 | 32.5 | 6.25 |
| Ewing Graham | ||||||
| A. P. Anthony | 170.625 | 65.625 | 341.25 | 65.625 | 170.625 | 32.8125 |
| E. D. Anthony | ||||||
| J. B. McDonald | ||||||
| Palm Beach Co | 24.375 | 9.375 | 48.75 | 9.375 | 284.375 | 54.6875 |
| Total | 260.000 | 100.000 | 520.00 | 100.000 | 520.000 | 100.0000 |
*1795 *803 Petitioner claimed a deduction in its tax return for its fiscal year ended June 30, 1925, as a loss on the stock purchased in 1923, $12,500 being one-half of its purchase price, claiming such loss to have been wrought by reason of the fact that it was forced, by the litigation referred to, to surrender, without consideration, one-half of its interest in the corporation whose stock it purchased. The Commissioner disallowed the deduction.
OPINION.
LOVE: The facts in this case are not controverted. Of course, in solving this problem, we must solve it in the light of, and in harmony with, the income tax laws. The applicable statute is section 204(a) of the Revenue Act of 1924, which is as follows:
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.
Petitioner, in May, 1923, purchased 32 1/2 shares out of a total issue of 260 shares of the Palm Beach Estates, Inc., stock, at a cost of $25,000, that is, at a cost per share (not being exact as to cents) of $769 per share.
In October, 1924, petitioner acquired, by virtue of a stock dividend, 32 1/2 additional*1796 shares, which brought its holdings up to 65 shares, at a cost of $25,000, or a cost per share of $384.50. Immediately thereafter, and as part of the plan which brought about that declaration of a stock dividend, acting in common with all other stockholders, petitioner surrendered 32 1/2 shares of its 65 shares into the escrow deposit as set forth in our findings of fact.
As a result of those transactions, petitioner found itself with a one-sixteenth interest in the corporation, instead of a one-eighth interest originally purchased, with no compensation for the one-sixteenth interest (one-half of its stock) which it had parted with, with no additional capital (invested or otherwise) in the corporation, and no enrichment of either itself or the corporation whose stock it held. If any benefit inured to petitioner, it was that the *804 corporation was put in a more strategic position to win the lawsuit in which it was then involved, and if such suit were finally won, would avert the complete wreck of the corporation, and consequent total loss of petitioner's investment of $25,000.
We believe that the situation here is that petitioner, impelled by the untoward exigencies*1797 confronting it, surrendered 32 1/2 shares of its stock, which had cost it $384.50 plus, per share (a total of $12,500) for which it received no direct compensation, and if any benefit of any kind inured to it, it was only the indirect benefit, as a stockholder, of having the corporation put in a more strategic position to win its lawsuit.
The case of , seems to be clearly applicable to the facts of this case, and authority for a decision, and we therefore hold that petitioner is entitled to a deduction from gross income for its calendar year 1925 of $12,500.
Reviewed by the Board.
Judgment will be entered for the petitioner.
LANSDON dissents.
MURDOCK, dissenting: I dissent for the reasons set forth in my dissenting opinion in George M. Wright,18 B.T.A. 471">18 B.T.A. 471.