*963 1. A trust, of which petitioners were beneficiaries, conveyed certain property to a corporation in consideration of the receipt of all of the stock of the corporation and the assumption by the corporation of certain preexisting indebtedness standing against the trust property. Held, following Brons Hotels, Inc.,34 B.T.A. 376">34 B.T.A. 376, that the assumption of the indebtedness will be regarded as "other property or money" as provided in section 112(c)(1) of the Revenue Act of 1932, and that the transaction accordingly resulted in taxable gain.
2. Where land has been sold on installment contract, with subsequent forfeiture and repossession by the seller, such repossession may constitute a satisfaction of the installment obligation "at other than its face value," as provided in section 44(d) of the Revenue Act of 1932. Boca Ratone Co. v. Commissioner, 86 Fed.(2d) 9, and Eggerman Investment Co.,36 B.T.A. 1196">36 B.T.A. 1196, followed.
3. Id. - Proof of the original cost or other basis of the property, the fair market value of the property at the time of repossession, and all other facts necessary to make a computation under the statute*964 are part of the burden assumed by petitioners. Absence of such proof requires approval of respondent's determination.
*949 These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners for the year 1933 in the following amounts:
| Walter F. Haass | $7,406.37 |
| Lillian A. Haass | 581.65 |
| Margaret H. Murphy | 110.38 |
The issues are as follows:
(1) Did the petitioners realize taxable income upon the exchange of property by a trust, of which they were beneficiaries, for the stock of a corporation and the assumption by the corporation of existing liabilities of the trust?
(2) Did the petitioners, Walter F. Haass and Margaret H. Murphy, realize taxable income, in addition to that reported by them, upon the repossession of lots sold on the installment basis by a trust of which they were beneficiaries?
(3) Should commissions paid in 1924 and 1925 be deducted in computing gain on repossession in*965 1933?
FINDINGS OF FACT.
The facts were stipulated substantially as follows:
The old Goebel Brewing Co., a corporation, hereinafter called the old company, was dissolved prior to 1920 by decree of the Circuit Court in Chancery of Wayne County, Michigan. In that proceeding a receiver was appointed to wind up its affairs, and the lands and buildings in the city of Detroit, Michigan, formerly belonging to that corporation were sold by the receiver in the year 1920 to Walter F. Haass, as trustee for himself and certain other associates, including petitioners Lillian A. Haass and Margaret H. Murphy, which he then held and continued to hold and manage in trust for the benefit and advantage of himself and his associates. This trust was thereafter known as the Detroit Industries Buildings, Walter F. Haass, trustee, hereinafter called Industries, 1726 Dime Bank Building Detroit, Michigan. The proportional interests of the three petitioners in the trust were, and continued to be throughout the year 1933, as follows:
| Walter F. Haass | an undivided 31.534 percent. |
| Lillian A. Haass | an undivided 4.762 percent. |
| Margaret H. Murphy | an undivided 1.667 percent. |
On November 16, 1932, Walter*966 F. Haass caused to be incorporated under the laws of the State of Michigan a new corporation known as *950 the Goebel Brewing Co., hereinafter called the new company, with an authorized capital of 50,000 shares of no par common stock, the price of which was fixed for sale in the articles of incorporation at $1 per share. The no par stock was converted into par stock in 1933, as hereinafter set forth. One thousand of such shares were subscribed on the articles of incorporation by Walter F. Haass, excepting two qualifying shares, which were subscribed by two other persons, but all of the shares were beneficially owned by Walter F. Haass as trustee of Industries. The 1,000 shares were fully paid for by the transfer by Walter F. Haass, trustee for Industries, to the corporation, of a land contract for the purchase of one lot (an addition to and part of the trust estate of Industries). The incorporation of the new company was for the benefit of Industries and the 1,000 shares were held for the use and benefit of that trust and for the benefit of the beneficiaries thereof, including the petitioners in the percentages set out above. On April 8, 1933, Walter F. Haass, as trustee*967 of Industries, offered to the new company to convey to it the lands and buildings belonging to Industries, subject to $165,000 of the preexisting indebtedness of Walter F. Haass as trustee for Industries, in exchange for $354,000 of par value of the capital stock of the new company, which, together with the $1,000 par value of stock acquired on subscription at incorporation, made a total of $355,000 par value of such stock and on the same day he offer was accepted by resolution of the board of directors of the new company, to take effect upon the delivery of a proper deed of conveyance from Walter F. Haass and Lillian A. Haass, his wife, to such lands and premises and the improvements thereon.
On April 8, 1933, the stockholders of the new company duly authorized an amendment to the articles of incorporation of that company, increasing its capital stock from 50,000 shares of no par value (stated value $1 per share) stock to 1,400,000 par value, divided into 140,000 shares of common stock of the par value of $10 each, and on April 10, 1933, the authorized common stock of the new company was increased from 50,000 shares of no par value to 140,000 shares of $10 par common stock. At*968 the stockholders' meeting of April 8, 1933, authorizing an increase in capital stock to $1,400,000, it was further resolved to offer for public sale $895,000 of such increase and to reserve $150,000 for allotment to the new officers, directors, and employees to be employed by the corporation.
On April 20, 1933, the trustee, for the benefit of Industries, transferred the lands and buildings known as Detroit Industries Buildings to the new company in exchange for 35,400 shares of common stock, par value $10 per share. On May 13, 1933, the articles of incorporation were amended, changing the par value of the common stock from $10 per share to $1 per share; that is to say, 1,400,000 shares of $1 *951 par stock. By reason of this change in par value the 35,400 shares, par value $10 per share, became 354,000 shares of $1 per stock, which, with the 1,000 shares subscribed and paid for at the time of incorporation, as aforesaid, made the total shares of stock owned by the trustee 355,000 shares, par value $1 each.
On April 20, 1933, and for the purpose of giving effect to such transfer to the new company, Walter F. Haass (his wife, Lillian A. Haass, joining therein only for*969 the purpose of barring dower) duly executed and delivered a deed of conveyance of the lands and buildings to the Goebel Brewing Co., which then accepted the deed of conveyance, subject to the preexisting liabilities of $165,000 and on the same day recorded the deed in the office of the register of deeds for the County of Wayne, State of Michigan. Immediately after the transfer on April 20, 1933, Walter F. Haass, as the trustee, owned all of the issued capital stock of the new company; namely, 35,500 shares of $10 par stock, which later by virtue of the change in par value above referred to became 355,000 shares of $1 par stock.
The preexisting liabilities of the trustee, aggregating $165,000, which the new company assumed and agreed to pay as a part of the transaction were as follows:
| Overdraft - First National Bank Detroit | $180.85 | |
| Note - principal and interest - payable First National Bank Detroit | 3,838.00 | |
| Land contract - principal and interest - payable Kuhn - Lot 152 Cass Sub. of Mullett Farm | 5,374.54 | |
| Mortgage - principal and interest - payable Mutual Benefit Life Insurance Company | 141,462.50 | |
| Management fees accrued and unpaid | 4,700.00 | |
| Accounts payable: | ||
| Race, Haass and Allen | $1,562.19 | |
| Coal for fuel | 1,150.53 | |
| Insurance premium | 775.46 | |
| Miscellaneous | 422.68 | |
| 3,910.86 | ||
| 1932 city, state and county taxes | 3,738.26 | |
| Interest and penalties and other miscellaneous liabilities of trustee | 1,794.99 | |
| Total | $165,000.00 |
*970 The loan payable to the Mutual Benefit Life Insurnce Co. on the property in question was originally for $150,000, but prior to 1933 the amount of $11,000 was paid thereon, leaving a remaining balance of $139,000 on the principal due on the loan. The interest thereon due to the date of the transaction here involved amounted to $2,462.50.
The depreciated cost of the lands and buildings to Walter F. Haass as such trustee was on April 20, 1933, the sum of $283,432.41. The trustee thereafter paid for services in relation to the transaction *952 57,758 shares of the stock so received from the new company. The respondent found that the trustee received the sum of $355,000 in par amount of stock and $165,000 of assumed indebtedness, or a total of $520,000 for the transfer of the lands and buildings to the new company. The respondent determined that the trustee realized a net profit on the exchange of $178,809.59, which is the difference bet ween the depreciated cost of $283,432.41 plus $57,758 paid for services ($341,190.41) and the total of $520,000; that this profit was fully taxable in the year 1933; that petitioners Walter F. Haass, Lillian A. Haass, and Margaret H. Murphy*971 realized profits of $56,385.82, $8,514.91, and $2,980.76, respectively, on their interests in the trust. The respondent, in determining that the trustee and the beneficiaries of the trust realized a taxable income on the exchange of $178,809.59, erroneously duplicated items aggregating $13,845.54 (being part of the indebtedness of $165,000 assumed by the new company), so that, if the respondent's theory of the result of the transaction should be sustained by the Board, the income resulting therefrom in 1933 to the trustee and the beneficiaries of the trust should be reduced by $13,845.54. The respondent now concedes that the correct figure is $151,154.46 ($165,000, less the admitted reduction of $13,845.54).
Prior to 1925 and continuously thereafter through the year 1933 Walter F. Haass was trustee of two separate real estate trusts, respectively known as the Gardner Park Syndicate, hereinafter called Gardner Park, and Golden Acres Syndicate, hereinafter called Golden Acres. The beneficial interest of petitioner Walter F. Haass Individually, in Gardner Park was an undivided 33 1/3 percent, and in Golden Acres was an undivided 25 percent. The interest of petitioner Margaret H. *972 Murphy in Golden Acres was an undivided 1.7 percent. Prior to January 1, 1926, Walter F. Haass, as such trustee, sold certain lots into which certain property of Gardner Park had been subdivided to sundry persons on executory installment land contracts, the legal title to the lots being retained by Walter F. Haass as such trustee. Prior to the same date Walter F. Haass, as trustee of Golden Acres, sold certain of the lots into which the lands owned by such syndicate had been subdivided to sundry persons on executory installment land contracts, the legal title to the lots being retained by Walter F. Haass as such trustee. Thereafter, with respect to both Gardner Park and Golden Acres, the trustee uniformly followed the plan of first recovering the investment in the lands and then reporting all further payments received on sales as profit in the year in which they were received, returnable by the respective beneficiaries as income for that year. No profit was reported on these two syndicates for any year prior to 1925. In the year 1928 this method of *953 reporting income was changed by the respondent for the returns filed by said trustee and the beneficiaries of said trusts*973 for the years 1926 and 1927, and the installment sales method prescribed by the respondent was thereafter followed by the trustee and the beneficiaries of the trusts for 1928 and subsequent years.
On the method of accounting employed by the trustee of Gardner Park and the respective beneficiaries thereof, $1i,000 was reported and returned as taxable income for the calendar year 1925, as profit on the entire subdivision, no allocation of that profit being made to the respective lots. During the calendar year 1933 the trustee of Gardner Park, on account of the defaults of the purchasers, declared a forfeiture on 36 lots sold by him upon executory land contracts in years prior to January 1, 1926.
For the period of January 1, 1926, to and including December 31, 1933, the respondent determined that the trustee and the respective beneficiaries of the trust, Gardner Park, should report as income 56.61 percent of all amounts received on account of the sale of the lots. The total collections on the 36 lots prior to the declaration of forfeiture thereof aggregated $28,998.68, of which $10,555 was collected prior to January 1, 1926, and $1,,443.68 was collected subsequent to January 1, 1926. *974 On the installment sales basis of accounting as determined by the respondent, the trustee of Gardner Park and the respective beneficiaries thereof reported as income on collection on the 36 lots made subsequent to January 1, 1926, 56.61 percent of $1,8443.68, or $10,440.97. When forfeiture of the lots was declared by the trustee on account of default in the purchase contracts, $12,582.53 was reported as income for 1933 by the trustee and the respective beneficiaries of the trust on account of moneys collected on the 36 lots upon forfeiture thereof in 1933, representing 43.39 percent of the total collections both before and subsequent to 1926 of $28,998.68.
The respondent determined that Gardner Park realized an additional profit of $6,252.13, consisting of $5,975.18 representing the difference between the amounts reported and the total amounts paid in by the purchasers, and $276.95 representing other additional profit on collections.
During the calendar year 1933 the trustee of Golden Acres on account of the default of the purchasers declared a forfeiture on 12 lots sold by him upon executory land contracts in years prior to January 1, 1926.
For the period of January 1, 1926, to*975 and including December 31, 1933, the respondent determined that the trustee and the respective beneficiaries of the trust, Golden Acres, should report as income 71.77 percent of all amounts received on account of the sale of the *954 lots. The total collections on the 12 lots prior to the declaration of forfeiture thereof of the 12 lots aggregated $8,424.97, of which $4,031.66 was collected prior to January 1, 1926, and ,393.31 was collected subsequent to January 1, 1926. On the installment sales basis of accounting as determined by the respondent, the trustee of Golden Acres and the respective beneficiaries thereof reported as income on collections on the 12 lots made subsequent to January 1, 1926, 71.77 percent of $4,393.31, or $3,153.08. When forfeiture of the lots was declared by the trustee on account of defaults in the purchase contracts, $2,378.37 was reported as income for 1933 by the trustee and the respective beneficiaries of the trust on account of moneys collected on the 12 lots upon forfeiture thereof in 1933, representing 28.23 percent of the total collections both before and subsequent to 1926 of $8,424.97. In connection with the 12 lots Golden Acres paid*976 during the years 1924 and 1925 commissions in the total amount of $3,146.50; made collections of $4,031.66 on the principal of the contract price for the lots, and also collected interest of $662.61 on the contracts. The syndicate or its members did not report any profit or income from the sale of the 12 lots for the years 1924 and 1925, and the respondent, in increasing the income of the trustee of Golden Acres and of the respective beneficiaries thereof for 1933 in the amount of $2,893.52 on account of the declaration of forfeiture on the 12 lots aforesaid did not make any adjustment for commissions paid in 1924 and 1925 or for interest received in those years.
OPINION.
VAN FOSSAN: The first issue involves the question of the recognition of gain by reason of the assumption of the liabilities of the transferor (Industries) upon the transfer of its property in exchange for all of the capital stock of the transferee corporation (the new company).
No gain is recognizable under section 112(b)(5) of the Revenue Act of 1932, 1 unless we regard the assumption of the Industries *955 liabilities by the new company as "other property or money", as provided by section 112(c)(1) *977 2 of the same act.
*978 Petitioners rely chiefly on , and ; affd., . Neither of these cases can longer be regarded as authority. In , the Board reconsidered the question involved in the Fashion Center Building Co. case and, having arrived at a conclusion contrary to that previously announced, overruled the cited decision. See also . The decision of the Circuit Court of Appeals affirming the District Court in the Hendler case was carried to the Supreme Court (subsequent to the filing of petitioners' briefs) and there reversed in .
In , the Board stated:
We are not unmindful of the fact that the assumption of a mortgage is not money in a true legal sense. It is, however, part of the consideration received; it is the equivalent of money, and in our opinion must be treated as money for the purposes of this case.
* * *
It is our conclusion*979 that the assumption of the mortgage indebtedness must be treated as money within the provisions of section 112(c)(1), supra * * *. No alternative solution has been suggested which does not do violence to some expressed statutory provision.
Albeit in the Hendler case the facts showed that the outstanding liabilities were assumed and paid, while in the instant cases the new company "assumed and agreed to pay" the liabilities of Industries, there being no evidence of actual payment, and although in his opinion in the Hendler case, Mr. Justice Black stresses the fact of payment there present, the decision, if it may be cited as supporting either position in the present controversy, must be held to support that of respondent. Certainly there is no longer any weight in the decision of the Circuit Court of Appeals on which petitioners so strongly rely.
On the authority of , we hold that the gain of $151,154.46 is taxable and the petitioners are liable for their proportionate shares thereof.
The second issue raises the question whether petitioners Walter F. Haass and Margaret H. Murphy have returned the full amount of *956 *980 gain realized upon the forfeiture of certain land contracts or are taxable on an additional amount representing the difference between the sums returned and the whole amounts paid in by the purchasers.
The petitioners are permitted by section 44 of the Revenue Act of 1932 to return profit on real estate sales on the installment basis under the regulations prescribed by the Commissioner. They did not so make their returns in 1925, 1926, and 1927, but in 1928 the method of reporting income applicable to the years 1926 and 1927 was changed by the respondent to the installment basis and was adopted by the petitioners for 1928 and subsequent year. Upon forfeiture and repossession the respondent applied article 353 of Regulations 74 and computed petitioners' gain accordingly.
The question of computing gain or loss upon the repossession of property which had been sold on installment contract, with subsequent forfeiture and repossession, was before the court in . It was held under the facts in that case that article 353 of Regulations 74, relied on by respondent here, was invalid and that section 44(d) of the Revenue*981 Act of 1928 3 should be applied. This holding was based on the conclusion that the repossession of the land sold on the installment basis constituted a satisfaction of the installment obligation "at other than its face value." See , in which the Board followed , and applied section 44(d) of the Revenue Act of 1932.
*982 In the cited cases, however, facts necessary to make the computation under section 44(d) were proved. Here we find that essential facts are lacking.
We have no means of gauging the amount realized in the taxable year. There is no evidence of the original cost or other basis at the time of the sale. The record discloses no facts upon which we may arrive at the fair market value of the property at the time of repossession. *957 We have not before us sufficient facts to show that the result of the computation of gain under the ruling laid down in the Boca Ratone Co. case would have been different from that determined by the respondent. Since the proof of these facts was part of the burden assumed by petitioners, we have no alternative but to approve the Commissioner's action on the point.
There remains for consideration the question of commissions amounting to $3,146.50 paid by Golden Acres during 1924 and 1925 in connection with the sale of the lots repossessed by it during 1933. No adjustment for such commissions was made by the respondent in his notice of deficiency. The petitioners claim that they are entitled the reduce the total collections on the Golden*983 Acres forfeited lots by the amount of such commissions, relying on the provisions of article 353 of Regulations 77, that the basis for taxation on repossession of property shall be the amount of payments actually received and retained by the vendor.
We have indicated above, following the Boca Ratone Co. and Eggerman Co. cases, that section 44(d) is applicable in these cases. Theis statute provides that "gain or loss shall result to the extent of the difference between the basis of the obligation and (1) * * * the amount realized", and further, "the basis of the 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." We find no authority in the statute for the treatment petitioners request.
Moreover, in (reversed on another point, ), we held that "commissions on sales are business expenses to be deducted in the year of accrual or payment * * * and are to be deducted in arriving at net income." *984 . In , the court held that commissions paid on the purchase and sale of securities are an expenditure of carrying on that business. The commissions in question do not appear to be of an essentially different character from those described in the cases cited. They were properly deductible in the years paid and are not an element in the capital cost of the lots repossessed. Therefore, such commissions are not a proper offset against the additional profit determined by the respondent.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) EXCHANGES SOLELY IN KIND. -
* * *
(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩
2. (c) GAIN FROM EXCHANGES NOT SOLELY IN KIND -
(1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. ↩
3. SEC. 44. INSTALLMENT BASIS.
* * *
(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 of the 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. This subsection shall not apply to the transmission at death of installment obligations if there is filed with the Commissioner, at such time as he may by regulation prescribe, a bond in such amount and with such sureties as he may deem necessary, condition upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment.
[Section 44(d) of the Revenue Act of 1932 is identical.] ↩