*1523 1. In 1917 stock in a corporation, a party to a reorganization, and money were exchanged for common stock and bonds in a new corporation a party to the reorganization. Held that this was not an exchange of stock or securities solely for stock or securities within the meaning of section 203(b)(2) of the Revenue Act of 1924.
2. Held that petitioners are not entitled to have the profit or loss from the sale of the stock received in 1917 from the reorganization computed under the provisions of section 204(a)(6) of the Revenue Act of 1924.
3. The basis for the determination of gain or loss on the sale or other disposition of the new stock acquired in 1917 determined from the evidence.
*447 The petitioners contend that the respondent erred in determining a deficiency in the amount of $3,682.06 against the Securities Company for 1924, and a deficiency in the amount of $2,942.93 against the Clinchfield Securities Company for 1924, (1) in that he has determined $84,000 (the value of certain stock on May 29, 1917, representing cost) to be*1524 the basis for determining gain or loss upon the sale of certain stock in 1924, and (2) in that he has failed to apply the provisions of sections 202, 203, and 204 of the Revenue Act of 1924, and particularly section 204(a)(6), in determining the basis for gain or loss upon said sale.
The two proceedings have been consolidated. The total additional tax of $6,624.99 asserted against the two companies arises out of one transaction, namely, the sale of 3,000 shares of Missouri Pacific Railroad Company common stock in 1924. There is no issue with respect to the division of such additional tax between the petitioners, which filed a consolidated return for that year, if the Board approves the respondent's method of computing a gain on the transaction.
FINDINGS OF FACT.
The parties hereto have submitted the following stipulation of facts:
1. The petitioner, the Securities Company, is a corporation incorporated under the laws of the State of New York on July 7, 1899, with its principal office at 452 Fifth Avenue, New York City.
2. The petitioner, the Clinchfield Securities Company is a corporation incorporated under the laws of the State of New York, with its principal office*1525 at 452 Fifth Avenue, New York City. Prior to February 26, 1925, its name was the Equitable Securities Company, but on that date by appropriate corporate action its name was changed to the Clinchfield Securities Company.
3. The Clinchfield Securities Company will be referred to hereinafter as the Equitable Securities Company.
4. During the entire period from January 1, 1909 and through December 31, 1924, Equitable Securities Company was a wholly owned subsidiary of The Securities Company, all of the capital stock of such subsidiary being owned by The Securities Company with the exception of directors' qualifying shares.
5. During the year 1909 said The Securities Company purchased 4000 shares of capital stock of the MissouriPacific Railway Company at an average cost of $70.36875 per share or for a total cost of $281,475. On December 9, 1910 by a book transaction this stock was transferred to Equitable Securities Company *448 at the said price of $281,475 and on December 1, 1911, by a book transaction the stock was retransferred to The Securities Company by the Equitable Securities Company at the same figure.
6. On June 11, 1913, the Securities Company purchased*1526 1000 shares additional of capital stock of the MissouriPacific Railway Company at $26 1/8 per share or for a total of $26,125 and thereafter during the same year 1913, The Securities Company sold 1000 shares of the capital stock of the MissouriPacific Railway Company for a total price of $30,467.50.
7. The market value of the Missouri Pacific Railway Company capital stock on March 1, 1913 was $37.75 per share.
8. Said MissouriPacific Railway Company (which was incorporated in 1909) was reorganized in the year 1917, pursuant to a plan of readjustment or reorganization, dated July 1, 1915, as modified under date of July 25, 1916, and pursuant to this plan of readjustment or reorganization as so modified, all or substantially all of the properties of said Railway Company were acquired in the year 1917 by the MissouriPacific Railroad Company, which was incorporated on March 5, 1917, in the State of Missouri. All or a major part of the properties of the said Railway Company were sold under bills of foreclosure on or about February 21, 1917, and the sale was confirmed by order of Court on or about March 6, 1917.
9. Pursuant to said plan of readjustment or reorganization*1527 as modified, the holders of capital stock in the Railway Company became entitled upon deposit of their stock and payment of $50 per share of such stock to receive common stock of the same par value in the new company, the said Railroad Company and General Mortgage 4% bonds maturing in 1975 of the new company in principal amount equal to the assessment paid.
10. In order to become participants under the said plan as modified, depositors of capital stock under the plan were required to make final payment of the said assessment of $50 per share before receiving the new securities to which they became entitled and not later than August 22, 1917. They were required to pay at least 25% of the amount of the said assessment of $50 per share on or before May 22, 1917. The new securities, i.e., the securities of the new company were ready for distribution by the reorganization managers, on or about June 26, 1917.
11. The new securities were not actually traded in on the principal market for such securities, to wit, the New York Stock Exchange, until on or about the following dates:
The common stock of the new company was first traded in on July 10, 1917, and on that date sold at*1528 a low of 29 3/4 and a high of 31 1/4.
The said new General Mortgage 4% bonds were first traded in on or about August 1, 1917, and the first sales were at 59 3/4.
12. Prior to these dates the said new securities sold in 1917 on the New York Stock Exchange on a "when issued" basis, and the price of the stock ranged from about 25 to 33 and the bonds from about 58 to 66. The said new securities sold on a "when issued" basis on or about March 6, 1917 - the common stock for 29 1/2-29 7/8, the said bonds for 65 3/4-66 and on or about June 26, 1917 - the stock for 32 1/4-33 and the bonds for 59-60 1/4. On May 29, 1917, the date the new stock was issued by the MissouriPacific Railroad Company, said stock was sold on the New York Stock Exchange $28at per share and the siad bonds for $60 1/2 per bond.
13. The Securities Company deposited the said 4000 shares of capital stock of said Railway Company owned by it under the said plan on or about *449 August 24, 1916, and paid the assessment with respect to the said 4000 shares of stock as follows: 25% thereof, or $50,000 on May 22, 1917, and 75% thereof or $150,000, plus interest amounting to $2,068.48 on August 22, 1917, and*1529 on that date received the securities of the new company, to-wit, 4000 shares of new common stock and $200,000 principal amount of General Mortgage 4% bonds. On or about that date the new common stock sold for 27 3/4-29 1/4 and the bonds for 57 5/8.
14. The said new securities received by The Securities Company have been sold as follows:
$50,000 principal amount of bonds in 1917 for $29,750.48;
$50,000 principal amount of bonds in 1921 for $27,561.25;
$100,000 principal amount of bonds in 1922 for $65,192.50.
1,000 shares of new common stock in 1922 for $23,835.00;
3,000 shares of new common stock in 1924 for $94,117.50.
15. The actual cost of the new securities (the 4000 shares of new common stock and the $200,000 principal amount of General Mortgage 4% bonds) is computed as follows:
| 3000 shares of stock of old company at 70.36875 | $211,106.25 |
| 1000 shares of stock of old company at 26 1/8 | 26,125.00 |
| Assessment paid | 200,000.00 |
| Total | $437,231.25 |
16. The Securities Company and Equitable Securities Company have together for the year 1924 paid federal income taxes as follows:
| $500.20 | on or about March 15, 1925 |
| 500.20 | on or about June 15, 1925 |
| 500.20 | on or about September 15, 1925 |
| 500.20 | on or about December 15, 1925 |
| $2000.80 | TOTAL |
*1530 17. A copy of the said plan of readjustment or reorganization as modified is annexed to the copy of this stipulation to be filed with the Board of Tax Appeals, as Exhibit A and made a part hereof.
18. In filing a consolidated return for the year 1924, a loss of $40,882.50 was claimed as a deduction, which was disallowed by the respondent and the respondent computed instead of any loss a profit of $10,117.50 as follows:
| Selling price in 1924 of 3000 shares of Mo. Pacific Rd. Co. stock | $94,117.50 |
| Value of 3000 shares of Mo. Pacific Rd. Co. as May 29, 1917, representing cost | 84,000.00 |
| Profit | $10,117.50 |
19. The loss now claimed by the petitioners from the sale of said 3000 shares of stock is computed as follows:
| 1909 purchased 4,000 shares - Missouri Pacific Railway Company | $281,475.00 |
| 1913 purchased 1,000 shares - Missouri Pacific Railway Company | 26,125.00 |
| Total | $307,600.00 |
| 1913 sold 1,000 shares - Missouri Pacific Railway Company (cost) | 70,368.75 |
| Cost of 4,000 shares prior to reorganization | $237,231.25 |
| Loss upon reorganization: | |
| March 1, 1913 value of 3,000 shares first purchase | |
| $113,250.00 | |
| Cost of 1,000 shares - June 11, 1913 | |
| 26,125.00 | |
| Assessment paid in cash | |
| 200,000.00 | |
| Total | |
| 339,375.00 | |
| Deduct: | |
| Market value of 4,000 shares of stock in new company at 30 1/2 | $122,000.00 |
| Market value of $200,000 bonds at 39 3/4 | 119,500.00 |
| 241,500.00 | |
| Allowable loss under 1917 Act | |
| $97,875.00 | |
| Basis to be Used and Loss Computed: | |
| Cost of 4,000 shares exchanged | |
| $237,231.25 | |
| Cash assessment | |
| 200,000.00 | |
| Total | |
| $437,231.25 | |
| Deduct: Allowable Loss under 1917 Act | |
| 97,875.00 | |
| Basis for computing profit upon sale of new stock and bonds | |
| $339,356.25 |
| Basis for computing profit from sale of new stock (4,000 shares) | $122,000.00/241,500.00 X $339,356.25 = $171,434.63 |
| Basis to be used in computing profit from sale in 1924 of 3,000 shares | 3/4 X $171,434.62 = $128,575.97 |
| Selling price 3,000 shares | 94,117.50 |
| Loss as adjusted by petitioners | $34,458.47 |
*450 (20) The "Modified Plan and Agreement of Reorganization" referred to in paragraph 17 of the stipulation provides in part as follows:
(Page 23) (3) Holders of stock must deposit the certificates representing their shares with Central Trust Company of New York * * * or with one of the sub-Depositaries for stock. Certificates of stock to be deposited must be duly endorsed in blank for transfer, or accompanied by proper instruments of transfer in blank, in either case duly stamped.
(Page 35) Fourth. Holders of certificates of deposit issued hereunder in respect of certificates of stock of the Missouri Pacific Companymust pay to the Readjustment Managers, as and when in this Article provided, at the office of Central Trust Company of New York, in the City of New York, in New York funds, or at the office of Mercantile Trust Company, St. Louis, Missouri, *1532 in New York funds, or at the office of Guaranty Trust Company of New York, in the City of London, England, in Sterling at the values of exchange to be fixed from time to time by the Readjustment Managers, or at the offices of such other Sub-Depositaries and at such other places and in such manner as the Readjustment Managers shall approve, fifty dollars ( $50) (plus accrued interest, if any, on new General Mortgage Four Per Cent Bonds offered to stockholders), as provided in the Plan, in respect of each share of stock represented *451 by their respective certificates of deposit and must accompany such payments by presentation of such certificates of deposit for appropriate notation thereon. If and when the Plan shall have been declared operative, as hereinafter provided, thirty days notice shall be given by the Readjustment Managers, in the manner provided in Article Eighteenth hereof, to the Depositors of such certificates of stock of a date to be fixed by the Readjustment Managers on or before which the payment above mentioned shall be due. Holders of such certificates of deposit for stock may either make such payments in full or at their option, respectively, pay twenty-five*1533 per cent. thereof on or before the date specified in said notice and the remaining seventy-five per cent. thereof three months thereafter, such deferred payments to carry interest at the rate of six per cent. per annum and to be secured by the stock deposited and by the securities of the New Company to which the holders of such certificates of deposit would be entitled on making their payments in full. Each payment shall be receipted for by the Depositary or Sub-Depositary by appropriate notation on the certificates of deposit issued for the deposited stock in respect of which such payments are made, upon presentation of such certificates of deposit as aforesaid.
All holders of certificates of deposit issued under the Plan and this Agreement in respect of stock of the Missouri Pacific Company severally and respectively agree, on behalf of themselves and of their respective transferees and assigns, that prompt payment of the cash which under the terms of the Plan and of this Agreement is required to be paid in order to entitle such holders to the General Mortgage Four Per Cent. Bonds and shares of stock of the New Company mentioned in the Plan, is an essential condition to the*1534 acquisition by them respectively of such bonds and shares of stock, and that any holder of such a certificate of deposit who shall fail to make prompt payment of said cash or any instalment thereof, payable as provided in the Plan or in this Agreement, on or before such date as shall be fixed or limited for such payment pursuant to the Plan and this Agreement or by any enlargement or extensions of time permitted by the Readjustment Managers, shall forthwith and without further or other notice or action cease to have any right to acquire such bonds and shares of stock of the New Company, which, pursuant to the provisions of the Plan and this Agreement, such holder might have acquired, and shall cease to have any rights in the shares of stock deposited and represented by his certificate of deposit, or their proceeds, or under such certificate of deposit, and shall cease to be entitled to any rights or benefits under the Plan or under this Agreement, and no such holder nor his successors in interest shall be entitled to the return of the shares of stock deposited and represented by his certificate of deposit or to the repayment of any cash theretofore paid hereunder in respect of said*1535 shares, or to have any further interest or right in or in respect thereof or under this Agreement, and such shares of stock shall be forfeited and pass to, and the ownership thereof shall vest in, the Readjustment Managers, their successors or assigns, or any such person, association, firm, corporation or syndicate as the Readjustment Managers in their discretion may determine, and they may use and transfer said shares for any purpose deemed by them useful or appropriate for carrying out the Plan and this Agreement, and any cash paid in respect of said shares as above provided, prior to the date of any such default shall belong to and be applied for the account of the Readjustment Managers for the purposes of the Plan. For payments made upon said shares of stock by the Readjustment Managers or such other person, association, firm, corporation or syndicate, General Mortgage Four Per Cent. Bonds and *452 shares of stock of the New Company shall be issued to the Readjustment Managers or such other person, firm, corporation or syndicate, as in the case of other payments made by depositing stockholders. The Readjustment Managers, however, in their absolute and uncontrolled discretion*1536 may in general or in particular instances from time to time enlarge or extend the time for making any payments required by the plan and this agreement, may waive any such default, and may accept payment of cash from any Depositor at any time overdue and with or without the imposition of such terms and conditions as they may prescribe.
(Page 36) Fifth. Each of the Committees and the Readjustment Managers are hereby severally vested under the terms of this Agreement, as trustees of an express trust, with the legal title to all securities of the class or classes represented by it or them respectively as aforesaid which may be deposited hereunder and the Depositors hereby assign and transfer the same to the Committees and the Readjustment Managers respectively. Every holder of a certificate of deposit issued hereunder, for himself and not for any other, does hereby sell, assign, transfer and set over unto the Committee or the Readjustment Managers, as the case may be, representing the securities mentioned therein, and to its or their respective successors and assigns, the securities deposited hereunder and mentioned in said certificate of deposit; and every Depositor hereby agrees*1537 that such Committee or the Readjustment Managers, as the case may be, shall be and hereby are vested with all rights and powers of complete ownership of such securities and of any other securities or other property at any time acquired hereunder by it or them respectively. [Italics supplied.]
OPINION.
TRAMMELL: This proceeding has been submitted upon a stipulation of facts including a copy of the "Plan and Agreement of Reorganization." We have set forth as paragraph 20 of the findings of fact pertinent provisions of said plan. Paragraph 19 of the stipulation as set forth in our findings consists of a computation made and submitted by the petitioners to the respondent as a proposed basis for a settlement of these proceedings.
In the consolidated return the petitioners took a deduction of $40,882.50 as a loss on the sale of the 3,000 shares of the common stock of the MissouriPacific Railroad Company in 1924. In the proposed basis for settlement submitted to the respondent they computed the amount of the loss at $34,458.47. In their brief they contend that they are entitled to deduct a loss of $42,106.57 or an additional amount of $1,224.07 in excess of the deduction taken*1538 in the return. The respondent contends that the petitioners not only did not sustain any deductible loss on the sale of the stock in 1924, but realized a profit of $10,117.50.
Pertinent provisions of the Revenue Act of 1924 are as follows:
SEC. 202. (a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized. [Italics supplied.]
* * *
SEC. *453 203. (a) Upon the sale or exchange of property the entire amount of gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section. (b) * * * (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* * *
SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired*1539 after February 28, 1913, should be the cost of such property; except that -
* * *
(6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the laws applicable to the year in which the exchange was made. * * *
It is thus seen that section 202 provides the method for computing gains or losses while section 203 provides what gains or losses shall be recognized for purposes of taxation under the Act. Section 204 provides the basis upon which gains or losses shall be computed under section 202.
The parties have stipulated that in 1909 the Securities Company purchased 4,000 shares of the capital stock of the MissouriPacific Railway Company at an average cost of $70.36875 per share, or at a total cost of $281,475. On June 11, 1913, the Securities Company purchased an additional 1,000 shares of the capital stock of the MissouriPacific Railway Company at $26 1/8 per*1540 share, or at a total cost of $26,125.
Sometime in 1913 and subsequent to June 11, the Securities Company sold 1,000 shares of the stock of the Railway Company for $30,467.50. Since the 1,000 shares thus sold were not identified, it becomes necessary to apply the rule of "first in, first out" and to hold that the shares were part of the purchase made in 1909. ; .
As a result of the foregoing transaction the Securities Company owned, at the time of the reorganization of the MissouriPacific Railway Company, 3,000 shares of the stock of that company which were purchased in 1909 at a cost of $70.36875 per share, or a total cost of $211,106.25, and had a market value of $37.75 per share, or a total market value of $113,250 on March 1, 1913. The Securities Company also owned the 1,000 shares of stock purchased on June 11, 1913, at a cost of $26,125.
Pursuant to the plan of reorganization the Securities Company paid to the "Readjustment Managers" an amount equal to $50 per share of stock held in the old Railway Company. In the stipulation *454 submitted by the parties it is stated*1541 that such payment was an assessment. The other evidence in the record however is inconsistent with this stipulation and shows that it was not an assessment. The "Plan and Agreement of Reorganization" shows that the deposit of stock with the depositaries or subdepositaries, and the payment of the amount of $50 per share of stock so deposited as provided therein was purely voluntary on the part of the stockholders of the MissouriPacific Railway Company. The stockholders were free to elect whether they would participate in the reorganization. But in order to participate in the reorganization under the plan and agreement it was necessary for the stockholders to deposit their stock and to make the payment required by such plan and agreement. Instead of there being a mere exchange of stock in the old company for common stock in the new company and cash for bonds, the two were inseparable. The stockholders had to turn in their stock in the old company plus $50 per share and received in return therefor an equal number of shares of common stock in the new company and bonds of the new company of a par value equal in amount to the cash paid.
The petitioners contend that the profit or*1542 loss from the sale of the stock in 1924 is to be computed under the provisions of section 204(a)(6) of the Revenue Act of 1924, since the transaction in 1917 whereby the common stock and bonds in the new company were acquired for stock in the old company plus the cash payment comes within the provisions of section 203(b)(2) of that act. The respondent contends that the provisions of section 204(a)(6) are not applicable, for the reason that the transaction in 1917 does not come within any of the subdivisions (b), (d), (e), or (f) of section 203, because the Securities Company gave stock and cash for stock and bonds.
In our opinion the respondent's contention is correct. The provisions of section 204(a)(6) are applicable only if the property sold was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203. The petitioners do not contend that the transaction in 1917 comes within the provisions of the subdivisions (d), (e), or (f) of section 203. They contend that the transaction was one whereby 4,000 shares of common stock in the new company and $200,000 principal amount of its bonds were received in exchange for 4,000 shares of stock in the old*1543 company, thereby bringing the transaction within subdivision (b) of section 203. This subdivision deals with an exchange, pursuant to a plan of reorganization, of stock or securities in a corporation a party to the reorganization solely for stock or securities in the same corporation or in another corporation a party to the reorganization. From what has been said heretofore, we think it is clear that the transaction *455 in 1917 in which stock in the old company and cash were exchanged for common stock and bonds in the new company was not an exchange of stock or securities solely for stock or securities within the intendment of subdivision (b) of section 203. A cash payment being involved, the transaction was one outside the provisions of the subdivision. The transaction in 1917 not coming within the provisions of subdivision (b) of section 203 or subdivisions (d), (e) or (f), the profit or loss from the sale in 1924 may not be computed under the provisions of section 204(a)(6), as contended for by the petitioners.
The Revenue Act of 1916, as amended by the Revenue Act of 1917, provides as follows:
SEC. 10. (a) That there shall be levied, assessed, collected, *1544 and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation * * * a tax of two per centum upon such income; * * *
* * *
For the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition by a corporation * * * of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived or loss sustained.
SEC. 12. (a) In the case of a corporation * * * such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources -
* * *
Second. All losses actually sustained and charged off within the year and not compensated by insurance or otherwise * * *.
The respondent contends that the exchange in 1917 of stock in the old company and money for common stock and bonds of the new company was a closed transaction in that year in so far as taxable gain or deductible loss resulted from the disposition of the stock is concerned.
*1545 With this view we agree. There is no provision in the Revenue Act of 1916 for the postponement of the determination of gain or loss on the sale or other disposition of securities. Under that act the transaction in 1917 gave rise to gain or loss. In the case of , the court held that where a new corporation was organized to take over the assets and assume the liabilities of an old corporation and acquired the stock of the old corporation in exchange for its own stock, the difference between the cost of the old stock and the value of the new constituted a taxable transaction under the Revenue Act of 1916. Following this principle, when the stockholders gave up their old stock and cash for new stock and bonds, they realized a taxable profit or *456 sustained a deductible loss on the disposition of their old stock. This profit or loss was the difference between the fair market value of what they received, to wit, the fair market value of the bonds and new stock on the day they were entitled to receive them, and the cost or March 1, 1913, value of the old stock, plus $50 per share. Since in this transaction the fair market*1546 value of the bonds and the fair market value of the new stock on the date the old stockholder was entitled to receive them were the amounts to be used to determine the amount of gain or loss from the disposition of the old stock, it is necessary in any subsequent disposition of the bonds or the new stock to use this same fair market value as the basis for gain or loss upon the disposition of these securities, so that there will not be a duplication of gain or loss. ; ; Regulations 45, art. 1564. We must, therefore, determine the date upon which the exchange of the old stock was consummated so that the petitioner was entitled to receive the bonds and new stock. The petitioner did not make its final payment under the plan of reorganization until August 22, 1917, and it was not entitled to receive the new securities until that date. But on that date it made the final payment and it actually received the new securities. In our opinion the exchange of the old stock was consummated on this date, and the fair market value of the new securities on this date is the basis to be used in computing*1547 the gain or loss on the later sale of 3,000 shares of the new common stock received by the petitioner on this date. It has been stipulated that on this date the new common stock sold for 27 3/4-29 1/4. The average of these figures is $28.50, which we accept as being the fair market value. The Commissioner erred in using a basis of $28 per share.
Reviewed by the Board.
Judgment will be entered under Rule 50.