Livingston v. Commissioner

JEFFERSON LIVINGSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Livingston v. Commissioner

Docket No. 30142.

United States Board of Tax Appeals

18 B.T.A. 1184; 1930 BTA LEXIS 2501;

February 17, 1930, Promulgated

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">*2501 1. In the year 1920 the petitioner conveyed to a corporation certain assets in exchange for all of the capital stock of the corporation. Held that the transaction was one giving rise to gain or loss, and that the cost to the petitioner of the capital stock received was the fair market value of the assets conveyed to the corporation.

2. The fair market value of said assets and the amount of loss sustained by the petitioner on the sale of said capital stock determined.

George E. H. Goodner, Esq., for the petitioner.

Bruce A. Low, Esq., for the respondent.

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MARQUETTE

">*1184 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1923 in the amount of $24,284.11. The deficiency arises from the disallowance by the respondent of a deduction taken by the petitioner on account of a loss claimed to have been sustained on the sale of certain shares of stock of the T. A. Snider Preserve Co.

FINDINGS OF FACT.

The petitioner is an individual residing in New York City.

In the year 1884 he entered the employ of the T. A. Snider Preserve Co., a corporation, and by the year 1909 he was">*2502 owner of all of the capital stock of that corporation. In the year 1911 the said corporation was dissolved and the petitioner thereafter and until August, 1920, continued the business as a sole proprietorship under the name of T. A. Snider Preserve Co. The business consisted of the operation of twelve plants engaged in the canning and packing of food products. The petitioner owned and featured the trade brand "Snider Catsup," and also used the names "Jersey Packing Co." and "Snider Catsup Co." in connection with certain of the plants.

In the year 1919 the petitioner decided to retire from the canning and packing business and he negotiated for the sale of his plants. ">*1185 Counselman & Co., brokers and bankers of Chicago, agreed to incorporate a company, to issue the capital stock of said company to the petitioner in exchange for his canning and packing business, and to purchase said capital stock from the petitioner for $2,000,000. Pursuant to said agreement between Counselman & Co. and the petitioner, Counselman & Co. organized a corporation and took out a charter therefor under the name T. A. Snider Preserve Co. The authorized capital stock of the corporation was">*2503 100,000 shares of class A stock of no par value and 50,000 shares of class B stock of no par value. The petitioner, on April 20, 1920, made a written offer to convey to the corporation all of the assets and property, except cash or good accounts or bills receivable, aggregating $434,124.93, used in connection with the business conducted by him under the name T. A. Snider Preserve Co., Snider Catsup Co., and Jersey Packing Co., in consideration of the issuance to him by the corporation of all of its capital stock. Said offer was accepted by the corporation on April 21, 1920. However, Counselman & Co. was either unwilling or unable to carry out its agreement and the deal was never consummated. In the same year, 1920, the petitioner procured from Counselman & Co. the charter of the new corporation and reimbursed Counselman & Co. for the expenses it had incurred.

On August 4, 1920, the petitioner made a written offer to the new corporation, which offer was in the words and figures following, to wit:

CHICAGO, ILLINOIS,

August 4, 1920.

THE T. A. SNIDER PRESERVE CO.,

An Illinois Corporation.

GENTLEMEN: I hereby offer, in lieu of my written offer to you under date">*2504 of April 20, 1920, to sell, assign, transfer, convey and deliver to you all of the property and assets, of every kind, nature or description whatsoever, real, personal and mixed, and wheresoever situate, tangible and intangible, belonging to me and used in connection with the business conducted by me, as sole proprietor, under the names of "The T. A. Snider Preserve Co.," "Snider Catsup Co." and the "Jersey Packing Co.," including the property and assets enumerated, referred to or included in a certain auditors' report of Ernst & Ernest, dated January 24, 1920, (as such aud tors' report has been changed as hereinafter stated) and in an appraisal made by the American Appraisal Company, dated December 31, 1919, (as such appraisal has been changed as hereinafter stated); including also the said business, the good will of said business, going values, trade names, trade marks, brands, recipes, formulas, and processes, copyrights, copyrighted articles, patents and inventions of all kinds whatsoever, all as a going concern; it being understood and agreed that for the purposes of this offer the said auditors' report and said appraisal have been changed by adding to the assets set forth therein">*2505 the following items:

Stationery and Supplies	$3,604.85
Prepaid Insurance	12,477.75
Prepaid Rent	447.91
Good Will	350,000.00

">*1186 and that in the liabilities as shown in said audit, the amount set up as a reserve for estimated Federal Taxes for the year 1919 has been changed from $360,000 to $288,074.55; and including also in the property to be sold and conveyed to you the stocks and bonds hereinafter set forth, upon the following terms and conditions:

1. Upon my delivery to you of good and sufficient instruments of conveyance conveying the business so conducted by me, and the property and assets above described, including the assets enumerated, referred to or included in a certain auditors' report of Ernst & Ernst, dated January 24, 1920 (changed as aforesaid) and including the assets enumerated, referred to or included in said appraisal made by the American Appraisal Company dated December 31, 1919 (changed as aforesaid), and including also the stocks and bonds hereinafter enumerated (the net value of all which assets and property according to such auditors' report and said appraisal (as changed as foresaid), is the sum of $2,263,410.94), you are">*2506 to make, execute and deliver to me, or to my nominee or nominees, 100,000 shares of the Class A stock of your Company, possessing the rights and priorities set forth in your certificate of incorporation, said shares of stock to be fully paid and non-assessable, and, further, you are to make, execute and deliver to me, or to my nominee or nominees, 32,682 shares of Class B stock of your Company, possessing the rights and priorities set forth in your certificate of incorporation, said shares of stock likewise to be fully paid and non-assessable; and, further, you are to pay me the sum of One Hundred Thousand Dollars ($100,000), said sum to be paid by you to me in such amounts and at such respective times as shall be demanded by me.

Further, it is understood that letters patent covering a bottle washing machine, constructed, built, improved, and operated by W. L. Street, standing in the name of Jefferson Livingston, which said letters patent are dated December 24, 1918, and an application for a patent pending on a Livingston rotary tomato washer likewise patented, improved and constructed by said Street, also a Livingston preserve cooling pan and a patent which I intend to apply for">*2507 for a machine for the automatic pasteurizing of filled cans, and a machine for the placing of a screw tin cap automatically on bottles, are not to be embraced in the transfer of the assets referred to, but you shall receive, without payment of royalties, a non-exclusive license to manufacture and use machines constructed under the aforesaid letters patent and applications for letters patent.

2. You shall take over the business, property, assets and effects hereinabove described, for all purposes, as of January 1, 1920, and all business transacted since said date shall be deemed to have been for your account and for your benefit and at your risk. You shall assume, pay and discharge all the liabilities of every kind or nature whatsoever owing by me in connection with said business, including the liabilities shown in said audit (as said audit has been changed, as aforesaid), and including also all federal income, excess-profits, war profits and surtaxes due the United States, as well as any of the states of the United States, for any period prior and subsequent to January 1, 1920; including also all federal, state and municipal taxes, charges and rates on all of said property so">*2508 to be transferred by me, all of which items shall be paid and assumed by you.

3. I attach hereto a balance sheet as of the close of business December 31, 1919, showing the assets and liabilities set forth in said auditors' report of Ernst & Ernst, dated January 24, 1920, and in said appraisal made by the American Appraisal Company, dated December 31, 1919, as such report and ">*1187 appraisal have been changed, as herein stated, said balance sheet being marked "Balance Sheet December 31, 1919."

4. The following is a list of the stocks and bonds hereinabove referred to:

STOCKS.

(a) 1,885 shares of the par value of Twenty Dollars ($20.00) each of the common capital stock of The Procter & Gamble Company;

(b) 2,880 shares of the par value of Twenty-five Dollars ($25.00) each of the common capital stock of The Owens Bottle-Machine Company;

(c) 200 shares of the common capital stock of Libbey-Ownes Sheet Glass Company;

(d) 200 shares of the common capital stock of American Laundry Machinery Company;

(e) 100 shares of the common capital stock of The Indian Refining Company;

(f) 100 shares of the common capital stock of The Cincinnati & Hamilton Traction Company;

">*2509 (g) 25 shares of the preferred capital stock of The Wm. Stacey Auction & Storage Company;

Said shares of stock referred to in the above sub-paragraphs (c) to (g) both inclusive, being of the par value of $100 each.

BONDS.

(a) $26,400 principal amount of United States Second Liberty Converted 4 1/4% Bonds;

(b) $13,350 principal amount of United States Third Liberty 4 1/4% Bonds;

(c) $33,200 principal amount of United States Fourth Liberty 4 1/4% Bonds;

(d) $58,000 principal amount of City of Dayton, Ohio, Street Improvement 4 1/2% Bonds, due Apr. 1, 1924;

(e) $6,000 principal amount of Wellsville, Ohio, 4 1/2% Refunding Bonds, due January 1, 1931;

(f) $15,000 principal amount of City of Hartshorne, Oklahoma, Waterworks 5% Bonds, due February 1, 1934;

(g) $28,000 principal amount of County of Lincoln, New Mexico, Court House and Jail 4 1/2% Bonds, due Jan. 1, 1940;

(h) $10,000 principal amount of Oklahoma City, Oklahoma, Waterworks 5% Bonds, due October 1, 1937;

(i) $50,000 principal amount of City of Cleveland, Ohio, Market House 4 1/10% Bonds, due October 1, 1940;

(j) $8,000 principal amount of Trumbull County, Ohio, Road District No. 1 Improvement 5% Bonds, ">*2510 Tenth Series, due March 1, 1935;

(k) $42,000 principal amount of City of Fort Worth, Texas, Waterworks Extension and Improvement Bonds, due April 1, 1951.

Very truly yours,

(Signed) JEFFERSON LIVINGSTON.

On the same day, April 4, 1920, said offer was accepted by the directors of said corporation and said stock was issued to the petitioner and the cash payment made to him. The remainder of the authorized class B stock was never issued by the corporation.

">*1188 The "Balance Sheet, December 31, 1919," mentioned in the petitioner's written offer of August 4, 1920, was as follows:

BALANCE SHEET DECEMBER 31, 1919.
Of Jefferson Livingston to The T. A. Snider Preserve Co., a corporation.
ASSETS
Cash on hand and in bank		$17,179.94
Notes receivable		63,905.73
Accounts receivable		564,076.27
Raw materials		358,467.21
Finished stock		242,127.83
Total current assets		1,245,756.98
Stocks (at cost)	$348,420.00
Bonds (at cost)	299,063.20
Investment		647,483.20
Land	$17,350.00
Buildings	498,046.34
Machinery and equipm't	769,522.01
Railroad sidings	12,575.12
Field equipment	10,686.82
Horses, wagons, auto	6,007.60
Furniture and fixtures	11,576.63
Total permanent assets		1,325.764.52
Scrap	$2,360.40
Stationery and supplies	3,604.85
Sundry advances	739.98
Accrued interest a/c rec	407.59
Prepaid insurance	12,477.75
Prepaid rent	477.91
Deferred charges		20,038.48
Good will		350,00u.00
			$3,589,043.18
LIABILITIES
Notes payable		$25,000.00
Accounts payable		85,337.53
Accrued Federal tax		288,074.55
Appreciated surplus		927,220.16
			1,325,632.24
NET ASSETS			2,263,410.94

">*2511 The net fair market value of the tangible assets conveyed by the petitioner to the corporation was $2,840,631.10.

The net worth of the T. A. Snider Preserve Co., the sole proprietorship, from April 30, 1906, to December 31, 1919, as shown by its books, was as follows:

Apr. 30, 1906	$213,265.83
Apr. 30, 1907	330,752.70
Apr. 30, 1908	385,514.03
Apr. 30, 1909	404,113.03
Apr. 30, 1910	449,968.73
Apr. 30, 1911	660,042.27
Apr. 30, 1912	518,990.28
Apr. 30, 1913	629,676.11
Apr. 30, 1914	$618,488.45
Apr. 30, 1915	640,387.88
Dec. 31, 1915	720,291.19
Dec. 31, 1916	827,528.98
Dec. 31, 1917	839,341.29
Dec. 31, 1918	1,266,778.61
Dec. 31, 1919	1,550,397.68

">*1189 The books did not reflect any value for good will or other intangibles.

The net earnings of the T. A. Snider Preserve Co., the sole proprietorship from April 30, 1906, to December 31, 1919, were as follows:

Year ending -	Profits
Apr. 30, 1907	$137,486.87
Apr. 30, 1908	54,761.33
Apr. 30, 1909	36,099.00
Apr. 30, 1910	170,855.70
Apr. 30, 1911	210,073.54
Apr. 30, 1912	23,752.47
Apr. 30, 1913	162,498.17
Apr. 30, 1914	$28,802.74
Apr. 30, 1915	161,922.52
Apr. 30, 1915, to Dec. 31, 1915	25,066.37
Dec. 31, 1916	255,110.48
Dec. 31, 1917	43,466.96
Dec. 31, 1918	587,542.72
Dec. 31, 1919	576,279.65

">*2512 The good will of the T. A. Snider Preserve Co., the sole proprietorship, at the time it was conveyed to the T. A. Snider Preserve Co., the new corporation, had a fair market value of $350,000.

In the year 1922 the T. A. Snider Preserve Co., the new corporation, changed its authorized capital stock from 100,000 shares of class A stock of no par value and 50,000 shares of class B stock of no par value, to 13,500 shares of preferred stock of the par value of $100 per share and 25,000 shares of common stock of the par value of $5 per share. The petitioner thereupon surrendered his 100,000 shares of class A stock and 32,682 shares of class B stock and in exchange therefor received 4,000 shares of preferred stock of the corporation and 8,333 shares of common stock, together with cash in the amount of $457,026.59 and securities of the value of $743,042.42. He then gave to employees of the corporation 3,333 shares of the common stock. In 1923 the petitioner sold his remaining stock in the corporation, consisting of 4,000 shares of preferred stock and 5,000 shares of common stock, for $492,500.

The petitioner, in his income and profits-tax return for the year 1920, did not report">*2513 any gain or loss from the conveyance of his property to the T. A. Snider Preserve Co., the new corporation, in exchange for the capital stock of that corporation. In his income-tax return for the year 1923 the petitioner deducted from gross income as a loss sustained on the sale of said 4,000 shares of preferred stock and 5,000 shares of common stock of the new corporation, the amount of $245,518.12, which was computed as follows:

Value of assets 12/31/19		$2,263,410.00
Less cash received		100,000.00
Cost of "A" and "B" stock		2,163,410.00
In 1922 the petitioner received
Cash	$457,026.59
Stocks and bonds	743,042.12
		1,200,069.01
And preferred and common stock for balance		963,340.99
Represented by
4,000 sh. pref. at $100 per share	$400,000.00
8,333 sh. com. at $67.60 per share	563,340.99
Total	963,340.99
He donated 3,333 shares com. at $67.60		225,322.87
Leaving balance of cost		738,018.12
In 1923 petitioner sold his remaining 4,000 sh. preferred and 5,000 sh. common for		492,500.00
Loss		245,518.12

">*1190 The respondent disallowed the deduction for the reason - that when you sold your individual business in 1920, the">*2514 T. A. Snider Preserve Company, to a corporation of the same name, there was an apparent profit realized of $1,348,823.46. It is noted that all of the stocks of the corporation were issued to you in exchange for the assets of the T. A. Snider Preserve Company. An examination of your 1920 return shows that the profit was not reported in 1920 and that you apparently treated the stocks as having no readily realizable market value in 1920. As the transaction was not treated as a closed one in 1920, the profit or loss on subsequent sale of the stocks should be based on the original cost of the assets to you, of the T. A. Snider Preserve Company, rather than on the alleged values in 1920 of the stocks. * * * and determined a deficiency in tax in the amount of $24,284.11.

OPINION.

MARQUETTE: In his return for the year 1923 the petitioner claimed and deducted as a loss sustained in that year on the sale of 4,000 shares of the preferred stock and 5,000 shares of the common stock of the T. A. Snider Preserve Co. the amount of $245,518.12. He now claims that the loss amounted to $828,890.18. The respondent denies that the petitioner sustained any loss on the sale in 1923 for the reasons">*2515 (1) that the assets conveyed by the petitioner to the T. A. Snider Preserve Co. in 1920 did not at that time have the fair market value claimed by the petitioner, and (2) that the transaction in 1920 was not one giving rise to gain or loss; that the cost to the petitioner of the stock of the corporation was the cost to him of the assets he conveyed to the corporation, and that such cost is the basis for computing gain or loss on the subsequent sale of the stock.

">*1191 We are of the opinion that the transaction in 1920 was one that should be recognized as giving rise to gain or loss, and that the fact that the petitioner did not report any gain therefrom in his return for 1920 does not preclude him from claiming a loss on the sale of the stock in 1923. We have heretofore held in numerous cases that where under the Revenue Act of 1918 assets were conveyed to a corporation in exchange for all of the capital stock of the corporation, the fair market value of the stock was equal to the fair market value of the assets at the date of conveyance; that gain or loss from the transaction should be measured by the difference between that fair market value and the cost of March 1, 1913, value">*2516 of the assets, and that the fair market value of the assets is also the cost to the transferor of the stock received in exchange. ; ; ; ; ; . We therefore hold that the cost to the petitioner of the shares of the capital stock of the T. A. Snider Preserve Co. received by him in 1920 was the fair market value of the assets he conveyed to the corporation, and that gain or loss from the subsequent sale of the stock should be computed on that basis. Section 202, Revenue Act of 1921.

We are satisfied from the evidence herein that the tangible assets conveyed by the petitioner to the T. A. Snider Preserve Co. in 1920 had a fair market value of $2,840,631.10, and that the petitioner also conveyed to the corporation good will which had a fair market value of at least $350,000, making a total value for the assets of $3,190,631.10. The petitioner received for those assets $100,000 in cash and the A and B">*2517 stock of the corporation. The cost to the petitioner of the A and B stock was, therefore, $3,090,631.10.

In 1922 there was a reorganization of the T. A. Snider Preserve Co. in which the petitioner surrendered his A and B stock and received in exchange cash, stocks and bonds, 4,000 shares of preferred stock at $100 per share and 8,333 shares of common stock. He donated 3,333 shares of common stock to employees of the corporation, and in 1923 he sold the remainder of his holdings for $492,500. We are of opinion that he sustained a loss on that sale computed as follows:

Fair market value of assets conveyed by petitioner to the T. A. Snider Preserve Co. in 1920		$3,190,631.10
Less cash received		100,000.00
Cost of A and B stock to the petitioner		3,090,631.10
In 1922 the petitioner received in exchange for A and B stock - cash	$457,026.59
Stocks and bonds	743,042.42
		1,200,069.01
Leaving balance of		1,890,562.09
For which he received 4,000 shares of preferred stock at $100 per share	$400,000.00
And 8,333 shares of common stock at $178.87 per share	1,490,562.09
	1,890,562.09
Deduct 3,333 shares common stock donated at $178.87 per share		$606,173.71
Balance of cost		1,284,388.38
Balance of stock sold in 1923 for		492,500.00
Loss		791,888.38

">*2518 ">*1192 Judgment will be entered under Rule 50.