*701 1. LOSS ON RETIRING BONDS. - Petitioner sold its bonds at a discount. As a result of non-taxable exchanges petitioner acquired bonds of another corporation which it exchanged for its own outstanding bonds, retiring the latter. The bonds so exchanged for its own bonds had a basis in petitioner's hands greater than the amount realized on the sale of its bonds. Held that difference between the basis of the bonds exchanged and the amount realized on the sale of its bonds, less a deduction taken for amortization of discount, represents a loss to the petitioner.
2. DETERMINATION OF BASIS. - The basis applicable to the bonds exchanged determined by applying a ratio based on the selling prices of the new securities, including the bonds, acquired in non taxable exchanges in place of the original property.
*520 This proceeding is before us on a petition for redetermination of a deficiency in income tax in the amount of $5,353.87 for the fiscal year ended May 31, 1930. The issue is whether the petitioner is entitled to a loss deduction upon the exchange*702 by it of bonds of another corporation for its own bonds.
FINDINGS OF FACT.
Petitioner is a Maine corporation, organized in 1928. In that year, 1928, the petitioner acquired for cash all the outstanding stock of two Rhode Island corporations, namely, Newport Water Works and Jamestown Water Co., hereinafter called the old Rhode Island companies. The aggregate cost to the petitioner of that stock was $3,314,490.15. In the same year the petitioner sold to the public its collateral trust bonds in the face amount of $1,660,800 at a discount of $116,256. In its income tax return for the fiscal year ended May 31, 1929, the petitioner claimed a deduction of $4,650.24 as amortization of that discount, leaving $111,605.76 as unamortized discount.
In its fiscal year ending May 31, 1930, the petitioner effected the organization of a new Rhode Island corporation, Newport Water Corporation, for the purpose of acquiring and operating, pursuant to a plan of reorganization, the properties and franchises of the old Rhode Island companies. Pursuant to the plan of reorganization the old Rhode Island companies transferred all their assets to the new Rhode Island corporation, in consideration*703 of which the new Rhode Island corporation assumed all the liabilities of the old Rhode Island companies and issued to the old Rhode Island companies its first mortgage bonds in the face amount of $1,700,000; 10,000 shares of its preferred stock; and 10,000 shares of its common stock. Immediately following the transfer, and pursuant to the plan of reorganization, the old Rhode Island companies were liquidated and dissolved. The petitioner, as holder of all of the stock of the old Rhode Island companies, received in liquidation all of the $1,700,000 bonds and the 20,000 shares of stock of the new Rhode Island corporation.
*521 Within the fiscal year ended May 31, 1930, the petitioner retired all of its outstanding collateral trust bonds in the face amount of $1,660,800 by exchanging therefor, par for par, an equal face amount of the mortgage bonds of the new Rhode Island corporation. Such exchange was provided for by the trust incenture securing the petitioner's collateral trust bonds.
Between December 23, 1929, and November 14, 1930, $42,500 face amount of the new Rhode Island corporation bonds acquired by the petitioner was sold at an average of 96.6 per cent of the*704 face amount.
On September 23, 1929, the petitioner sold for cash 3,250 shares of the preferred stock of the new Rhode Island corporation at $90 per share. On September 19, 1930, it sold the 10,000 shares of common stock for $555,000.
The basis for gain or loss to the petitioner on the bonds of the new Rhode Island corporation was $103.37 for each $100 face amount of the bonds.
OPINION.
ARUNDELL: The first step in the several transactions outlined that is of moment in these proceedings is the purchase by the petitioner of stock of the two old Rhode Island companies for $3,314,490.15 cash. Thereafter, through exchanges and liquidations, pursuant to plans of reorganization, it acquired in place of that stock the bonds and the stock of the newly organized Rhode Island corporation. It is stipulated that the exchanges and liquidations took place pursuant to plans of reorganization and counsel for the parties are in agreement that there was no gain or loss to the petitioner on those transactions whereby the new bonds and stock were acquired in place of the stock of the old Rhode Island companies. It follows that the basis to the petitioner for gain or loss on the new bonds*705 and stock together is the same as the basis of the stock of the old Rhode Island companies in its hands, which basis is the cost thereof in the amount of $3,314,490.15
The next step, and the one which gives rise to the controversy here, is the exchange by the petitioner of a part of the new bonds for its own bonds outstanding in the hands of the public. On this transaction the petitioner says it sustained a loss. It has been held the sale of bonds acquired in the manner that the new bonds were acquired by this petitioner may result in gain or loss. . In that case the taxpayer acquired for cash all the stock of six corporations. The six corporations exchanged all their assets for preferred and common stock and bonds of a seventh; the six distributed the stock and bonds so received to the taxpayer, and the taxpayer sold all of the bonds and *522 the preferred stock to outside interests for an amount which exceeded by $163,090.86 the cost of the stock of the six corporations. We held: (1) That the sale of the preferred stock was a non-taxable transaction by reason of the affiliation of the taxpayer and the seventh*706 corporation; (2) that the sale of bonds was a taxable transaction, following ; (3) that the entire gain of $163,090.86 should be included in income because of the taxpayer's failure to establish the cost, separately, of the stock and bonds. Sales and exchanges are treated alike by the statute, save for the enumerated non-recognition situations, and the exchange in this case is to be treated as the sale was in the Ohio Central Telephone case, that is as resulting in gain or loss. Neither party points to any of the non-recognition provisions as applicable to the exchange of the new bonds for petitioner's bonds and we are of the opinion that none of them do apply.
The point wherein this case differs from that of the Ohio Central Telephone case is that here the petitioner has made an allocation of cost among the three classes of securities of the new Rhode Island Corporation. It works out the allocation this way: $42,500 face value of the bonds were sold at an average price of 96.6; 3,250 shares of the 10,000 preferred shares were sold at $90 per share; all of the 10,000 common shares were sold for $555,000. *707 This establishes the aggregate market value of the three classes of securities to be as follows:
| Bonds, $1,700,000 face value | $1,642,200 |
| Preferred stock, 10,000 shares | 900,000 |
| Common stock, 10,000 shares | 555,000 |
| Total | 3,097,200 |
On these figures the ratio of the value of the bonds ($1,642,200) to the total value ($3,097,200) is 53.02 per cent. Applying this percentage to the carried over basis of $3,314,490.15 (original cost of the old securities) gives a basis of $1,757,342.67 applicable to the $1,700,000 face value of new bonds, which amounts to $103.37 for each $100 face value. The figure of $103.37 applied to the $1,660,800 face amount of new bonds exchanged for a like face amount of old bonds gives a total basis for such new bonds of $1,716,768.96. On the issue of old bonds at 93 the petitioner realized $1,544,544. The difference between the amount realized on the sale of the old bonds and the basis of the new bonds exchanged therefor represents a loss to the petitioner. That difference amounts to $172,224.96. However, that loss should be offset by the amount of amortization taken as a deduction in petitioner's return, $4,650.24, leaving $167,574.72*708 as the net amount of loss sustained and deductible.
Decision will be entered under Rule 50.