*300 Decision will be entered under Rule 50.
Petitioner's property was partially destroyed by fire. The insurance proceeds received in settlement were expended, together with other funds, to acquire control of another corporation owning property similar to that destroyed. Thereafter the subsidiary corporation was liquidated by petitioner. Held, the gain incident to the involuntary conversion is not taxable by virtue of section 112 (f) of the Internal Revenue Code.
*7 The respondent determined the following deficiencies for petitioner's fiscal year ended May 31, 1943: income tax, $ 23,720.39, and declared value excess profits tax, $ 12,440.33.
The principal issue raised in the petition*301 and answer is whether the insurance proceeds received in payment for petitioner's property destroyed by fire were expended in acquiring control of another corporation owning similar property, within the meaning of section 112 (f) of the Internal Revenue Code. Petitioner alleged as error respondent's failure to allow a declared value excess profits tax credit equivalent to 10 per cent of the above corporation's capital stock valuation. In view of the fact that counsel for petitioner made no mention of this issue in his opening statement or on brief, we assume this issue has been abandoned. Respondent, in the computation of the above deficiencies, made several adjustments in petitioner's net income which are not now in issue.
By amended answer the respondent affirmatively alleges that he erred in determining petitioner's basis for depreciation and its cost of goods sold, by reason of which he claims an increase in the deficiency.
FINDINGS OF FACT.
Petitioner, a Texas corporation chartered in 1887, had its principal office in Fort Worth, Texas. It maintained its books and records and filed its corporation tax returns on an accrual basis for a fiscal year ending May 31 of each year. *302 Its income and declared value excess profits tax return for the fiscal year here involved was filed with the collector of internal revenue for the second collection district of Texas. Petitioner was engaged primarily in the business of milling, processing, and selling grain products.
In 1942 petitioner owned and operated properties at Wolfe City, Texas, which consisted of a flour mill, corn mill, mixed feed plant, storage bins, warehouses, and equipment required for the milling *8 business. On or about August 13, 1942, petitioner's property at that location was partially destroyed by fire. The destroyed assets and the adjusted basis thereof were as follows:
| Depreciation | |||
| Cost | allowed or | Adjusted | |
| allowable | basis | ||
| Mill building | $ 6,106.96 | $ 2,967.50 | $ 3,139.46 |
| Elevator building | 7,007.77 | 6,024.15 | 983.62 |
| Machinery | 24,785.70 | 16,840.85 | 7,944.85 |
| Warehouse | 13,984.79 | 9,076.52 | 4,908.27 |
| Steel tank | 4,886.48 | 2,940.78 | 1,945.70 |
| Total | 56,771.70 | 37,849.80 | 18,921.90 |
The destroyed property was covered by fire insurance, the proceeds of which were collected by petitioner on or about November 14, 1942. The insurance payment, totaling $ 124,551.10, was*303 deposited in the Fort Worth National Bank in a special account created for the purpose of receiving this money. Only $ 118,200.16 of the proceeds represented settlement for the destroyed assets, the remainder of the payment, or $ 6,350.94, being an unexpired premium refund.
During the year in issue petitioner's outstanding stock was owned by the following stockholders:
| Stockholder | Shares owned |
| Mattie Kimbell Carter | 3,072 1/2 |
| Kimbell Milling Co | 2,680 |
| Kay Kimbell | 450 |
| C. B. Smith | 22 1/2 |
| W. L. Newsom | 25 |
| Total | 6,250 |
Its officers consisted of Kay Kimbell, president; Coleman Carter, Jr., vice president; and W. L. Newsom, secretary-treasurer.
Kimbell Milling Co. was actively engaged in the grain elevator business and did no flour milling at all. Its capital stock were beneficially owned by Kay Kimbell. Qualifying shares were held by W. L. Newsom and Coleman Carter, Jr., husband of Kimbell's sister, Mattie Kimbell Carter. In early 1942 Whaley Mill & Elevator Co., a Texas corporation, hereinafter called Whaley, owned and operated a flour and feed processing plant at Gainesville, Texas. Its buildings and equipment were very similar to petitioner's plant*304 at Wolfe City, each having approximately the same capacity. At that time Whaley's stock was owned by approximately 60 shareholders. In June of that year Kimbell Milling Co. deposited $ 210,000 in a Gainesville bank, to be used in buying Whaley's stock from the stockholders. When the shares were presented to the bank, payment therefor was made at the rate of $ 55 a share, a price based on an earlier appraisal of Whaley's assets by the purchasing corporation. Except for an agreement in *9 June 1942 for the purchase of stock from one disgruntled shareholder, Kimbell Milling Co. entered into no preliminary contracts or agreements with Whaley, or the stockholders thereof, for the acquisition of stock. Purchase of all shares was not completed until December of that year. On December 15, 1942, a stock certificate was issued by Whaley in the name of Kimbell Milling Co.
Because of building restrictions and wartime shortages which precluded the purchase of new machinery of the type destroyed, petitioner was unable to physically rebuild the milling facilities. On December 26, 1942, petitioner purchased all of Whaley's stock from Kimbell Milling Co. for $ 210,000. The insurance proceeds, *305 in amount of $ 118,200.16, were expended in the acquisition of Whaley's stock, the balance of the consideration, $ 91,799.84, being advanced from general funds.
At a special meeting on the date of purchase, petitioner's directors approved the transaction set forth in the minutes below:
That, Whereas, on or about August 1, 1942, the flour mill and milling plant of Kimbell Diamond Milling Company located at Wolfe City, Texas was destroyed by fire; and
Whereas, Kimbell-Diamond Milling Company collected from the insurance companies carrying the insurance on the said destroyed properties the sum of $ 125,000.00 as indemnification for the loss sustained, which said insurance proceeds were by the proper officers of this corporation promptly deposited in a special account in the Fort Worth National Bank of Fort Worth, Texas, where they have since been kept intact in order to have the same available for replacing, as nearly as might be, the destroyed properties; and
Whereas, it has at all times been the intention and desire of Kimbell-Diamond Milling Company to replace its burned mill either by constructing a new mill or by purchasing facilities of substantially similar kind and use; and
Whereas, *306 due to existing building restrictions and other causes, it has been found impractical and impossible to replace the destroyed facilities by new construction, but it has come to the attention of the officers of this corporation that the stock of Whaley Mill & Elevator Company, a Texas corporation, which, among its other assets, owns physical properties substantially comparable to the destroyed Wolfe City Milling plant, can be purchased;
Now, Therefore, Be It Resolved:
1. That the proper officers of Kimbell-Diamond Milling Company be, and they are hereby, authorized, empowered and directed to purchase the entire authorized, issued and outstanding capital stock of Whaley Mill & Elevator Company, a Texas corporation, consisting of 4,000 shares of the face or par value of $ 100.00 per share, for a sum not in excess of $ 210,000.00; that payment for the said stock of Whaley Mill & Elevator Company be made, to the extent possible, from the insurance proceeds deposited in a special account in the Fort Worth National Bank, and that the balance of the agreed consideration for the stock of Whaley Mill & Elevator Company be paid out of the general funds of Kimbell-Diamond Milling Company.
2. *307 That as soon as practicable after the purchase of the Whaley Mill & Elevator Company stock hereby authorized has been consummated, all necessary steps be taken to completely liquidate the said corporation by transferring its entire assets, particularly its mill and milling equipment, to Kimbell-Diamond *10 Milling Company in cancellation and redemption of the entire issued and outstanding capital stock of Whaley Mill & Elevator Company, and that the charter of the said corporation be forthwith surrendered and cancelled.
On December 29, 1942, the stockholders of Whaley assented to the dissolution and distribution of assets thereof. On the same date, an "Agreement and Program of Complete Liquidation" was entered into between petitioner and Whaley which provided, inter alia:
That, Whereas, Kimbell-Diamond owns the entire authorized issued and outstanding capital stock of Whaley, consisting of 4000 shares of a par value of $ 100.00 per share, which said stock was acquired by Kimbell-Diamond primarily for the purpose of enabling it to secure possession and ownership of the flour mill and milling plant owned by Whaley, the parties herewith agree that the said mill and milling plant*308 shall forthwith be conveyed to Kimbell-Diamond by Whaley under the following program for the complete liquidation of Whaley viz:
(1) Kimbell-Diamond shall cause the 4000 shares of the capital stock of Whaley owned by it to be surrendered to Whaley for cancellation and retirement, whereupon Whaley shall forthwith convey, transfer and assign unto Kimbell-Diamond all property of every kind and character owned or claimed by it, particularly its flour mill and milling plant, located at Gainesville, Texas, and all machinery and equipment appurtenant thereto, or used in connection therewith, in full and complete liquidation of all of the outstanding stock of Whaley. The aforesaid distribution in complete liquidation shall be fully consummated by not later than midnight, December 31, 1942.
(2) When the entire assets of every kind and character, owned by Whaley, have been transferred to Kimbell-Diamond in full and complete liquidation of the capital stock of Whaley, owned by Kimbell-Diamond, Whaley shall forthwith make application to the Secretary of State of the State of Texas for its dissolution as a corporation and surrender its corporate charter.
Liquidation was completed on December *309 31, 1942, and a certificate of dissolution was issued by the Secretary of State for the State of Texas on that date. When petitioner filed its tax return for the fiscal year ended May 31, 1943, it also submitted data with respect to the liquidation of Whaley.
In its income and declared value excess profits tax return for the fiscal year in issue petitioner did not include in net taxable income the amount of the insurance proceeds, less the adjusted basis of the destroyed assets, a net amount of $ 99,278.26. This gain was omitted on the theory that section 112 (f) applied to the whole transaction. Respondent included this gain in net taxable income, with the following explanation in the deficiency notice:
Due to your relationship with Kimbell Milling Company, from whom you acquired, on December 26, 1942, 100% of the capital stock of Whaley Mill and Elevator Company, Gainesville, Texas, it is held the insurance proceeds were not expended in the acquisition of control of the Whaley Mill and Elevator Company, which control already existed in your stockholders. The total amount of insurance recovery was applied by you in the purchase of Whaley Mill and Elevator Company stock. It is*310 held Section 112 (f) of the Internal Revenue Code is not applicable. It is further held that under Section *11 117 (j) of the Internal Revenue Code a taxable gain from involuntary conversion was realized in the amount of $ 99,278.26.
OPINION.
The primary question for our decision is whether the respondent erred in determining that the involuntary conversion of petitioner's property did not occur within the provisions of section 112 (f) of the Internal Revenue Code. 1
*311 The facts are not in dispute. Petitioner owned and operated a milling plant at Wolfe City, Texas. In August 1942 this plant was partially destroyed by fire. Insurance in the sum of $ 118,200.16 was received in settlement of the destroyed assets on November 14, 1942, and this sum was promptly deposited in a special account in the Fort Worth National Bank, which account was created for the purpose of receiving this money. On December 26, 1942, this money, together with additional funds of petitioner, was used to acquire 100 per cent of the stock of the Whaley Milling Co. Whaley was engaged in a business similar to petitioner's, and its assets were of substantially the same general nature as the assets of petitioner which had been destroyed. It would seem on these facts that petitioner clearly brings itself within the language of the statute, and that the profit incident to the involuntary conversion would not be presently taxable.
Respondent argues, however, that petitioner can not be said to have acquired control of Whaley subsequent to the destruction of its plant at Wolfe City, as it had that control prior thereto. This argument is based on the fact that the stock of petitioner*312 was owned by the Kimbell Milling Co. (which in turn was 100 per cent owned by Kay Kimbell), Kay Kimbell, and the latter's sister, Mattie Kimbell Carter, and the Kimbell Milling Co. in turn owned 100 per cent of the stock of the Whaley Co. It is then reasoned that petitioner, through its stockholders, directly or indirectly controlled Whaley from some time in June 1942 and prior to the time petitioner's property was destroyed.
The fallacy of this argument becomes apparent when we realize that "control" within the meaning of section 112 means ownership by *12 the taxpayer, 2 and it was not until December 26, 1942, that petitioner secured the ownership of the Whaley stock. Nothing short of this constitutes statutory "control"; and we may not substitute control of a practical nature, family relationship, or any other type of control than ownership. Moreover, this record does not support the assumption of respondent that the Kimbell Milling Co. was the owner of all the Whaley stock as early as June 1942. It seems more likely that this ownership was not secured by the Kimbell Milling Co. before December 1942.
*313 On these facts we think the petitioner has met the objection which was posed in the notice of deficiency and which was the basis of the error assigned in the petition. There was no ownership or control by petitioner of the stock or assets of Whaley prior to the purchase of the latter's shares on December 26, 1942.
Respondent in his amended answer affirmatively alleges that he erred in determining petitioner's basis for depreciation and its cost of goods sold and presents the view that what petitioner really acquired was not stock in Whaley, but the assets of Whaley. In support of his view, he points to the fact that the minutes of the petitioner authorizing the purchase of Whaley stock provided for the prompt liquidation of that company and the taking over by petitioner of the Whaley assets, which is in fact exactly what was done. If the transaction is to be so viewed, then the basis for the assets thus taken over must be the adjusted basis of petitioner's destroyed property (sec. 113 (a) (9)), 3*315 plus the added capital used in the purchase of those assets. Regulations 111, sec. 29.113 (a) (9)-1. In support of this position, respondent relies on Commissioner v. Ashland Oil & Refining Co., 99 Fed. (2d) 588,*314 which case, in effect, treats the purchase of stock and the subsequent liquidation of the company as but two steps in a single transaction. If, however, the purchase of the shares be regarded as one transaction and the liquidation of the Whaley Co. be regarded as a separate transaction, section 112 (b)*13 (6) of the code 4 would apply and the basis of the property acquired from Whaley would be the latter's adjusted basis. Sec. 113 (a) (15). 5 As this is apparently much higher than the basis under section 113(a) (9), the matter of how the transaction is to be viewed becomes of importance.
Upon the legal premise that the basis of the Whaley assets in petitioner's hands is the lower basis determined pursuant to sections 112 (f) and 113 (a) (9), respondent claims that petitioner realized additional income from sales and that depreciation originally allowed was excessive. If the position respondent now urges had been the basis for his original determination, with the burden of proof on the taxpayer to establish the contrary, we would have a different situation. But the burden rests on the party affirmatively raising these questions -- here, *316 the Commissioner 6 -- to establish not only the legal premise, but also all the material facts necessary to support his claims for the additional items of income. Even if he be right as to the proposition of law advanced, he has offered no factual basis to form a predicate for his claims that petitioner realized additional income. He has merely contented himself with making a mathematical computation by arbitrarily assigning to the several different assets taken over from Whaley a definite figure which he contends is the basis that should be used in determining such matters as depreciation, profit on the sale of inventory taken over, etc. Thus, by revaluing the inventory, respondent changes the cost of goods sold, without offering any proof that any part of the inventory taken over from Whaley was in fact sold by petitioner within the taxable year. He changes the amount of depreciation without offering any evidence as to what in fact would be the correct amount. He apparently uses, as a basis in revaluing the assets of Whaley, information he has taken from a revenue agent's report which is not even in evidence.
*317 As a starting point for his computation, respondent uses certain figures which he says represent the adjusted bases of the several Whaley assets. Although certain allegations with respect thereto were pleaded in the petition, they were denied in the answer; and affirmative allegations in this connection in the amended answer were denied in the reply. Neither party offered any evidence bearing thereon. However, even if we should treat as established the adjusted bases of the several Whaley assets, the respondent's position would not be helped. Any reallocated basis would have to be bottomed on *14 market value, and there is no testimony or other proof in the record on this point. Glenn H. Curtiss, 21 B. T. A. 629; affd., 57 Fed. (2d) 847; Sallie Strickland Tricou, 25 B. T. A. 713; Hazeltine Corporation, 32 B. T. A. 4; affirmed without discussion of this point, 89 Fed. (2d) 513.
In this state of the record we prefer not to decide, in this proceeding, the legal question as to whether the purchase of shares in Whaley by the petitioner*318 constitutes as a matter of law the acquisition of Whaley assets. We leave that question open for determination in any appropriate proceeding involving a later year, where a record presenting an adequate factual basis may be made. We shall let the present case rest on the issue raised in the petition and answer, founded on the determination as made by the Commissioner in the first instance.
It is our conclusion that petitioner has met the requirements of section 112 (f), and that the gain from the receipt of the insurance is not taxable to petitioner.
Decision will be entered under Rule 50.
Footnotes
1. (f) Involuntary Conversions. -- If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain).↩
2. Sec. 112↩. (h) Definition of Control. -- As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
3. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --
* * * *
(9) Involuntary conversion. -- If the property was acquired, after February 28, 1913, as the result of a compulsory or involuntary conversion described in section 112 (f)↩, the basis shall be the same as in the case of the property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made.
4. (6) Property received by corporation on complete liquidation of another. -- No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. * * *↩
5. (15) Property received by a corporation on complete liquidation of another. -- If the property was received by a corporation upon a distribution in complete liquidation of another corporation within the meaning of section 112 (b) (6)↩, then the basis shall be the same as it would be in the hands of the transferor. * * *
6. Rule 32, Rules of Practice before The Tax Court.↩