*1968 Where petitioner, a corporation, issued the majority of its shares of stock to a corporation from which it had received certain property, but such corporation immediately transferred a part of such stock to others in conformity with a preexisting understanding, leaving such corporation the owner of less than one-third of the capital stock of petitioner, held, that section 331 of the Revenue Act of 1921 should not be applied to limit the amount to be included in petitioner's invested capital on account of the assets which petitioner had received from such corporation. H. L. Neuman Co. et al.,16 B.T.A. 533, followed.
*1303 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $1,195.50.
It is alleged that the respondent erred in refusing to include in the invested capital of the petitioner the value of certain assets on February 1, 1920, the date they were acquired from the Leffingwell Rancho, Inc., and in holding that the cost of such assets to the predecessor*1969 *1304 corporation is the amount to be included in petitioner's invested capital.
FINDINGS OF FACT.
The Leffingwell Rancho, Inc., was a California corporation, having as its principal stockholders members of the Leffingwell family. It later changed its name to the Leffingwell Investment Company. This corporation owned a tract of land upon which it operated an orange and lemon orchard.
During 1919 the Leffingwell family was desirous of retiring from the business and decided to subdivide and sell the ranch. A part of the land was sold to the employees of the Leffingwell Rancho, Inc., who, in 1919, incorporated the East Whittier Rancho under the laws of California, to take over such property. In the negotiations between the Leffingwell Rancho, Inc., and its employees it was found that the employees could not finance entirely the purchase of this land. It was decided, therefore, that a corporation be formed to take the land and issue bonds to the Leffingwell Rancho, Inc., as part payment for such land.
On January 8, 1920, the Leffingwell Rancho, Inc., and East Whittier Rancho entered into an agreement which provided that the former company should organize a corporation*1970 under the laws of California called "Leffingwell Rancho Company," with a capital stock of $500,000, divided into 5,000 shares at $100 each; that the newly organized company should proceed to issue first mortgage bonds aggregating $100,000; that the Leffingwell Rancho, Inc., should convey to the new company certain property in Tract 3359; that in consideration of the conveyance of such property, the new company should cause to be issued to the Leffingwell Rancho, Inc., 2,800 shares of stock and all of the $100,000 of bonds; that thereafter the new company should, through East Whittier Rancho, sell 400 shares of stock at stipulated prices and terms; that the new company should purchase from the Leffingwell Rancho, Inc., certain supplies on the Leffingwell Rancho; that the Leffingwell Rancho, Inc., should lend the new company money not to exceed $38,000 as working capital, to be repaid from the sale of the 400 shares of treasury stock, or if such stock should not be sold, then to be repaid by the acceptance by the Leffingwell Rancho, Inc., of treasury stock of the new company at par; that East Whittier Rancho should buy from the Leffingwell Rancho, inc., 745 shares of its stock in the*1971 new company received for the property, at $92.50 per share, at stated deferred payments, the Leffingwell Rancho, Inc., to hold the stock endorsed in blank as collateral; and that the Leffingwell Rancho, Inc., should give East Whittier Rancho an option for one *1305 year to buy or sell 856 additional shares of its stock in the new company at stipulated deferred payments.
On January 16, 1920, East Whittier Rancho wrote a letter to the Leffingwell Rancho, Inc., which stated, in part, as follows:
The Board of Directors of East Whittier Rancho, at their meeting of January 14th, voted to accept the contract with the Leffingwell Rancho, Inc. of January 8th provided the proposed new company can be put into operation and the property transferred in the very near future.
We have disposed of a considerable portion of our orange land, and will have the money available for making the initial payment on 51% of the stock of the new company in a few days; and as the contract provides that the second payment is to be made September 15, 1920, it seems extremely desirable from our standpoint that the new company be organized and put into operation by February 1st, if possible. It is probably*1972 the intention that the new company would be able to pay dividends prior to the date of the second payment.
* * *
The Leffingwell Rancho Company, the petitioner in this proceeding, was duly organized under the laws of California on February 2, 1920, and by a contract entered into between it and the Leffingwell Rancho, Inc., and East Whittier Rancho, it became a party to the contract of January 8, 1920.
All the negotiations were to the end that the employees of the Leffingwell Rancho, Inc., should gain control of the land in question and the plan proposed for attaining that end was simply a more convenient and expedient method. The Leffingwells wanted to get out of the business as quickly as they could and they did not want to have any delay in the issuance of a permit from the California Corporation Commissioner. The application for the permit, therefore, did not request permission to issue stock of the petitioner for part cash and part notes, but requested permission to issue stock and bonds of petitioner for property of the Leffingwell Rancho, Inc.
On March 29, 1920, the Commissioner of Corporations of California issued a permit to the petitioner, providing in part as*1973 follows:
Pursuant to its application, LEFFINGWELL RANCHO COMPANY is permitted to sell and issue to Leffingwell Rancho, Inc., in exchange for all of the property described in said application, first to be transferred to applicant, 2,800 shares of its capital stock and bonds not exceeding in their aggregate par or face value $100,000, of that certain issue authorized to be issued by it, in and by proceedings of its Board of Directors and of its stockholders as recited in the copy filed herein of a Certificate of the Original Creation of a Bonded Indebtedness, filed March 2, 1919, in the office of the Secretary of State of the State of California.
The stock and bonds of the petitioner were duly issued as provided in the permit. The bonds carried no control of the corporation.
The following is a tabulation of the record of stock certificates issued by the petitioner.
| No. | Shares | In favor of - | Date | Remarks |
| 1 | 0 | Pasted in minute book | ||
| 2 | 1 | C. W. Leffingwell | 2/20/20 | Trfd. 5/3/20 to E. B. Matthews. |
| 3 | 1 | C. W. Leffingwell, jr | 2/20/20 | Trfd. 11/1/23 to Kenneth Peck. |
| 4 | 1 | H. A. Schuyler | 2/20/20 | Trfd. 4/12/20 to Lef. Inv. Co. |
| 5 | 1 | E. B. Matthews | 2/20/20 | Trfd. 4/12/20 to Lef. Inv. Co. |
| 6 | 1 | Arnold Praeger | 2/20/20 | Trfd. 2/9/23 to C. W. L., jr. |
| 7 | 395 | J. D. Sievers | 3/3/20 | Trfd. 11/17/22 to E.W.R. (200 Sh.) |
| 8 | 745 | East Whittier Rancho | 4/12/20 | This stock still belongs to E.W.R. |
| 9 | 856 | East Whittier Rancho | 4/12/20 | Do. |
| 10 | 2,800 | Leffingwell Investment Co | 4/12/20 | Trfd. 4/12/20 to E.W.R., 1,651 |
| Sh.; to others 155 Sh. | ||||
| 11 | 50 | East Whittier Rancho | 4/12/20 | This stock still belongs to E.W.R. |
| 12 | 10 | H. W. Nixon | 4/12/20 | No change. |
| 13 | 10 | H. A. Schuyler | 4/12/20 | Do. |
| 14 | 10 | J. R. LaFollette | 4/12/20 | Do. |
| 15 | 25 | P. W. Schuyler | 4/12/20 | Do. |
| 16 | 55 | P. W. Schuyler | 4/12/20 | Do. |
| 17 | 50 | I. G. McBeth | 4/12/20 | Trfd. 5/27/24 to C. A. Jensen 40 Sh. |
| 18 | 40 | I. G. McBeth | 4/12/20 | No change. |
| 19 | 5 | J. D. Sievers | 4/12/20 | Trfd. 3/1/23 to I. G. McBeth. |
| 20 | 996 | Leffingwell Investment Co | 4/12/20 | Still in the Leffingwell family. |
*1974 *1306 Certificates numbered 2, 3, 4, 5, and 6 were issued to the incorporators of the petitioner.
Certificate No. 7, for 395 shares, was issued to J. D. Sievers for cash. Sievers was not interested in the Leffingwell Investment Company.
Stock certificates numbered 8, 9, and 10 were all issued in the office of the petitioner at about the same time. There were present at that time Arnold Praeger, who was secretary of both the Leffingwell Investment Company and the petitioner, and C. W. Leffingwell, Jr., president of the Leffingwell Investment Company. Earle B. Matthews, who was assistant secretary of the petitioner and secretary and director of the East Whittier Rancho, knew that East Whittier Rancho was buying the shares of stock represented by certificates numbered 8 and 9, and it did not occur to him that all of the 2,800 shares would have to be first issued to the Leffingwell Investment Company in exchange for the assets. He, therefore, issued shares of stock to East Whittier Rancho before stock certificate numbered 10, for 2,800 shares, was issued to Leffingwell Investment Co. Praeger informed him, however, that the permit provided that the stock must be issued*1975 to Leffingwell Investment Company. Matthews then immediately issued certificate numbered 10, for 2,800 shares, to the Leffingwell Investment Company and placed it in the hands of Praeger and Leffingwell. Leffingwell immediately endorsed this certificate to transfer 1,601 shares to East Whittier Rancho and other amounts to various individuals, practically all of whom were stockholders of East Whittier Rancho. The certificate for 2,800 shares was then canceled and pinned to the stub in the stock certificate book. Certificate numbered 11, for 50 shares, was also issued to East Whittier Rancho, making a total of 1,651 shares which that company received. Stock certificates numbered 12 to 20 were then *1307 issued to the Leffingwell Investment Company and to some of the stockholders of East Whittier Rancho who had money available and who were taking stock individually. All the stock that the Leffingwell Investment Company actually received was the 996 shares under stock certificate numbered 20.
In computing the petitioner's invested capital for the year 1921 the respondent held that section 331 of the Revenue Act of 1921 was applicable and that the assets received by the*1976 petitioner from the Leffingwell Rancho, Inc., should be included at the value shown on the books of the predecessor corporation.
At the hearing, the following stipulation was read into the record:
It is hereby stipulated and agreed by and between the parties hereto, through their respective counsel, that should the board find that Section 331 of the Revenue Act of 1921 controls the determination of this petitioner's invested capital for the year involved in this proceeding, to-wit, 1921, that then the deficiency, as determined and proposed by commissioner of internal revenue, and set forth in the deficiency letter made the basis of this appeal, may be approved; that should the board find that section 331 of the Revenue Act of 1921 does not control the determination of this petitioner's invested capital for the year involved in this proceeding, to-wit, 1921, then the board may find a deficiency against this petitioner in the sum of $78.74.
OPINION.
MCMAHON: The only question here presented is whether the respondent, in computing the petitioner's invested capital for the year 1921, erred in applying section 331 of the Revenue Act of 1921, which provides in part as follows:
*1977 That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received; * * *
The evidence discloses that there was an understanding between the members of the Leffingwell family, who were the principal stockholders in the Leffingwell Rancho, Inc., and the employees of the Leffingwell Rancho, Inc., that the employees should obtain a controlling interest in certain land owned by the corporation. The employees had already formed a corporation, East Whittier Rancho, to operate certain property which the employees had purchased, and it was through the medium of East Whittier Rancho that it was proposed to transfer to the employees the proposed interest. It was found*1978 in the negotiations that the employees could not raise sufficient capital to purchase the land outright from the Leffingwell *1308 Rancho, Inc., so the petitioner corporation was formed with the understanding that petitioner would issue $100,000 in first mortgage bonds to the Leffingwell Rancho, Inc., as part payment for the land. The testimony disclosed that it was anticipated that delay would be caused in the issuance of a permit from the California Corporation Commissioner if an application were filed by petitioner to issue stock for part cash and part notes. To avoid such a delay, an application was filed for a right to issue 2,800 shares of petitioner's stock and $100,000 par value bonds to the Leffingwell Rancho, Inc., for the property in question. Such permit was duly issued to the petitioner and on April 12, 1920, a stock certificate for 2,800 shares of stock was issued to Leffingwell Rancho, Inc., the name of which had been changed to Leffingwell Investment Company. However, on the same date and at about the same time, in the office of the petitioner, the president of the Leffingwell Investment Company endorsed this certificate to transfer 1,601 shares to East Whittier*1979 Rancho, and the certificate for 2,800 shares was canceled. This was in accordance with a preexisting agreement between the Leffingwell Rancho, Inc., and East Whittier Rancho. Fifty additional shares were also issued to East Whittier Rancho on the same date, making the total holdings of East Whittier Rancho, 1,651 shares. A certificate for 996 shares was issued on the same date to the Leffingwell Investment Company. From the tabulation of the stock certificates issued by the petitioner, it appears that at the time of the issuance of these shares of stock the petitioner had issued a total of 3,202 shares of its capital stock. Thus the holdings of East Whittier Rancho amounted to about 51 1/2 per cent of the total shares issued by the petitioner, whereas the interest of the Leffingwell Investment Company amounted to less than one-third of the total issued shares of the petitioner. The fact that momentarily the Leffingwell Investment Company held 2,800 shares of the total of 3,202 shares does not, in our opinion, render section 331 of the Revenue Act of 1921 applicable.
In *1980 , practically the same situation existed. In our opinion in that case, we stated:
The only question is whether section 331 of the Revenue Act of 1921 is applicable to the facts. In february, 1919, the petitioner, which had been organized in January, 1919, received from H. L. Neuman the assets of the ice, ice cream and dairy products business formerly conducted by him as an individual and issued to him $199,800 par value of its capital stock in full payment. The other two shares were sold by the corporation to E. W. Neuman and J. W. Neuman for cash at $100 per share. Immediately thereafter, on the same day, the certificate made out to H. L. Neuman, was canceled and new certificates were issued, 2 shares of H. L. Neuman, and 998 shares each to E. W. Neuman and J. W. Neuman. This was done to effect a prior agreement between H. L. Neuman and his sons by which they were to buy *1309 him out. They gave their father their notes, secured by bonds, and the stock was held by their father as collateral.
On this state of facts the petitioner contends that 50 per centum or more of the interest or control did not remain with*1981 the same person (H. L. Neuman) who formerly owned the business. That contention is based primarily on the assumption that interest or control did not remain in H. L. Neuman, and was never, for practical purposes, in him, since it was understood that the sons were to have control.
We do not believe that section 331 requires a construction that the momentary ownership of nearly all the stock in the corporation by the owner of the predecessor business is enough to make the section applicable. * * *
* * *
We do not believe the word "remains," as used by Congress, is to be construed as applying to a state of facts in which the person who receives the stock has entered into a definite agreement to have such stock reissued to others and who carries out such agreement coincident with the issuance to him of the stock. * * *
* * * But in this proceeding there was a definite obligation unperformed, i.e., the immediate transfer of the stock to others. We consider that the interest or control did not "remain" in H. L. Neuman.
Upon the authority of the above quoted case, we hold that an interest of 50 per centum or more in the property or business of the petitioner did not remain*1982 in the Leffingwell Investment Company, and that respondent erred in the instant proceeding in applying section 331 of the Revenue Act of 1921. In accordance with the stipulation of the parties, which we have set forth in our findings of fact, we find that there is a deficiency in the sum of $78.74.
Reviewed by the Board.
Judgment will be entered that there is a deficiency in the amount of $78.74.
MURDOCK dissents.