*2308 The evidence fails to show a value for stock issued in part payment of property different from that determined by the Commissioner.
*897 The deficiency being questioned is for the year 1924 in the amount of $5,078.18. The issue is the value of certain shares of stock given in 1920 in part payment of property for the purpose of computing loss or gain on the sale of the property in the taxable year.
FINDINGS OF FACT.
The petitioners are the trustees of the Avenue Real Estate Trust, a Massachusetts trust with its principal office in Boston, Mass. Immediately prior to December 30, 1920, all of its outstanding 5,303 shares of capital stock, par value $100 per share, except 50 shares, which were owned by John D. Hardy, the then trustee, in his individual capacity, were held by the estate of William B. Rice.
The property of the Avenue Real Estate Trust on December 30, 1920, consisted of the Hotel Puritan, a residential and transient hotel, located at 390 Commonwealth Avenue, Boston, Mass., an adjoining lot having a frontage*2309 of 59.38 feet on Commonwealth Avenue and *898 containing 7,254 square feet of land, and a vacant parcel in the rear of the hotel site having a frontage of 200 feet on Newbury Street and containing 18,000 square feet of land. The hotel was a brick and stone building, with a steel frame, having 7 floors and a basement and containing 190 rentable rooms, exclusive of bathrooms, closets, service rooms, dining rooms, etc. It was constructed in 1909 at a cost of $602,699.03, and in 1920 was in first-class condition. The reproduction cost of the building on December 30, 1920, was about $950,000. The hotel, including its equipment, and the adjoining vacant land, had a fair market value on December 30, 1920, of about $1,000,000.
The assets and liabilities of the Avenue Real Estate Trust on December 30, 1920, prior to the acquisition of the Hotel Ericson in the manner hereinafter related, were according to its books as follows:
| ASSETS | ||
| Land-Commonwealth Avenue | $119,717.28 | |
| Newbury Street | 38,113.62 | |
| $157,830.90 | ||
| Construction | 602,699.03 | |
| Less depreciation | 120,135.00 | |
| 482,564.03 | ||
| Furniture and cafe equipment | 130,779.27 | |
| Less depreciation | 32,094.04 | |
| 98,685.23 | ||
| Accounts receivable | 26,492.32 | |
| Insurance prepaid | 1,331.80 | |
| Cash | 4,605.51 | |
| 771,509.79 | ||
| LIABILITIES | ||
| Capital stock | $530,300.00 | |
| Accounts payable | 10,379.35 | |
| Profit and loss | 230,830.44 | |
| 771,509.79 |
*2310 The accounts receivable had a value substantially equal to their face amounts.
The net income of the Hotel Puritan for the year 1919 before making any charges for mortgage interest, depreciation and obsolescence of its license to sell liquors, aggregating $46,452.70, was $66,775. Its net income in 1920 and 1921 before making any charges for depreciation amounting to $27,814.28 in 1920, and $29,290.28 in 1921, was, respectively, $66,409.93 and $69,548.57.
Because of the style of its construction, location, and the possibilities the land adjoining it offered for development, in 1920 the Hotel Puritan enjoyed an excellent position among other hotels in Boston. It was one of the best built hotels of its kind in Boston, and as a family hotel in 1920 it was regarded as the best and had the highest *899 class of clientele. In 1920 there was a shortage of hotels in Boston, particularly of good apartment and family hotels in the district where the Hotel Puritan was located.
On December 30, 1920, the Avenue Real Estate Trust purchased the Hotel Ericson, located at 373 Commonwealth Avenue, Boston, from the estate of William B. Rice, subject to a mortgage in the amount of*2311 $80,000. The seller's equity in the property was paid for by 400 shares of the capital stock of the buyer.
The property purchased consisted of 5,684 square feet of land improved by a six-story brick and stone building containing 20 apartments, some of which were furnished, one physician's office suite, and a kitchen and dining room designed to serve 80 or more people. The furniture in the apartments was worth about $15,000.
The following entry was made on the books of the trust for the purchase:
| Ericson Real Estate | $120,000 | |
| Capital Stock | $40,000 | |
| Mortgage Payable | 80,000 |
On December 31, 1920, the Avenue Real Estate Trust doubled its outstanding capital stock and issued a stock dividend for the additional 5,703 shares. In preparation for the stock dividend the books of the trust were adjusted by charging profit and loss, $200,000; real estate, $58,407; construction, $257,005.90; Newburg Street land, $14,886.38; Ericson real estate, $40,000; and crediting surplus with the total charges of $570,300. The stock dividend was entered on the books by charging surplus with $570,300 and making a balancing entry in the capital stock account.
In 1924, after*2312 paying off the mortgage of $80,000, the Avenue Real Estate Trust sold the Hotel Ericson for $150,000, of which $40,000 was paid in cash and the balance was covered by a mortgage maturing within three years with interest at the rate of 6 per cent per annum. The selling expenses, paid by the seller, amounted to $2,100.
There were no sales of Avenue Real Estate Trust stock in or about 1920.
In computing the profit realized on the sale of the Hotal Ericson in the taxable year the respondent used as a basis a cost price on December 30, 1920, of $120,000, this sum being the amount of the mortgage assumed, plus $40,000 as representing the value of the 400 shares of stock issued in payment of the seller's equity.
OPINION.
ARUNDELL: On December 30, 1920, the Avenue Real Estate Trust, hereinafter referred to as the "Trust," purchased the Hotel Ericson located at Boston, Mass., from the estate of William B. Rice. *900 The property so purchased was sold in the year 1924 and we are called upon to determine the cost price of the hotel in order that the gain or loss, if any, upon this sale may be fixed. Immediately before December 30, 1920, the date of the purchase, all of the*2313 outstanding shares of the capital stock of the "Trust" were owned by the estate of William B. Rice, with the exception of 50 shares which were owned by John D. Hardy, the then trustee in his individual capacity. There were issued in payment for the equity of the Rice estate in the Hotel Ericson 400 shares of capital stock of the "Trust." After the consummation of this transaction the number of shares outstanding was 5,703, all of which were owned by the William B. Rice estate, except the 50 shares held by Hardy.
The shares of stock of the "Trust" were not listed on any exchange. None of them have ever been sold on the market and all were closely held. The petitioners seek to establish the cost of the Hotel Ericson by establishing a value for the 400 shares issued in exchange therefor. No evidence was offered as to the value of the Hotel Ericson itself, but evidence was offered as to the value of the Hotel Puritan and its adjoining property, which constituted the only assets of the "Trust" prior to the purchase of the Hotel Ericson. We have found as a fact that the Hotel Puritan, including its equipment, adjoining vacant land, etc., had a fair market value on December 30, 1920, of*2314 about $1,000,000. The petitioner urges that this valuation would give to the shares a value of at least $190 each and that the cost price of the Hotel Ericson should be fixed at $156,000, being the value of 400 shares of stock at $190 per share, plus the amount of the mortgage assumed.
We are not prepared to say that the method used by petitioner in determining the cost of the Hotel Ericson might not in some circumstances be sufficient, but we do not believe that it should be accepted as establishing the cost price of the Hotel Ericson. As heretofore pointed out the estate of William B. Rice owned all the stock of the "Trust," with the exception of 50 shares, and it was the one selling the Hotel Ericson to the "Trust." As stated by counsel for petitioner, the transaction was one "from the right hand to the left hand" and was not an arm's-length transaction. As petitioner's brief puts it, "the transaction was merely one by which the Estate of William B. Rice transferred the property from its direct ownership into the name of a trust of which the same estate owned practically all the capital stock. There was actually no question of valuation involved in this transaction." Under*2315 the circumstances in this case it would have mattered little to the estate of William B. Rice whether it received 400 shares of the capital stock of the "Trust," or 4,000 shares, or in fact one share. We have no *901 doubt that, if only one share had been given for the property, petitioner's counsel would hardly urge their method as in fact determining the cost price of the Hotel Ericson to the "Trust." If the purchaser had agreed to issue 4,000 shares instead of the 400, the price fixed under the petitioner's computation, instead of being $76,000 for the equity in the Hotel Ericson, would have been $760,000. It seems clear, in the circumstances, that the cost to the "Trust" of the Hotel Ericson can not be established without evidence of the value of the Hotel Ericson at the time it was paid in to the "Trust."
At the time of the purchase the "Trust" entered the Hotel Ericson on its books at a value of $120,000. This value was arrived at by taking the capital stock at its par value of $40,000 and adding thereto the mortgage assumed of $80,000. This figure of $120,000 is also the figure accepted and used by respondent as the cost of the property. There are other reasons*2316 which suggest themselves as affecting the true value of the stock at $190 per share, such as the small earnings of the corporation, etc., but in the view we take of the matter it is not necessary to discuss these phases of the case because we are satisfied that the evidence offered does not overcome the presumption of correctness attaching to respondent's determination.
Decision will be entered for the respondent.