*962 PROPERTY ACQUIRED BY EXCHANGE - CONTROL BY TRANSFERORS; - A tract of land was transferred by individuals to a corporation of which they were stockholders. All the capital stock of the corporation had been issued in payment for another tract of land and there was no evidence that the individuals intended to make a gift of the land to the corporation or to pay it in as paid-in surplus. Held, the transfer in question was a sale, and the Commissioner erred in holding that the basis for determination of gain or loss on sale of the land by the corporation in the tax years was the same as in the hands of the transferors. Held, further, that payments made by the corporation to one of the individuals were understood by her to be payments of part of the purchase price of the land, were treated as such by her in her income tax return and by the corporation on its books, and were in fact payments to her and are taxable as capital gain and not as dividends.
*349 These proceedings*963 involve income tax liability. They were consolidated. The petitions request redetermination of the following deficiencies:
| Petitioner | Year | Deficiency |
| Herff & Dittmar Land Co | 1927 | $5,472.91 |
| Do | 1928 | 12,546.71 |
| Do | 1929 | 9,676.61 |
| Do | 1930 | 3,933.89 |
| Emmy Dittmar | 1929 | 2,972.20 |
The questions presented for our decision are:
(1) Did the Commissioner err in his determination that the basis for determining the gain or loss from the sale of real estate by the Herff & Dittmar Land Co. was the same as in the hands of the transferors of the property as provided in section 204(a)(8) of the Revenue Act of 1926 and section 113(a)(8) of the Revenue Act of 1928?
(2) Did the Commissioner err in his determination that the distribution received by Emmy Dittmar in the year 1929 constituted a dividend paid by the Herff & Dittmar Land Co.?
The facts were presented to the Board by stipulation, documentary evidence and oral testimony, from which we make the following findings of fact.
*350 FINDINGS OF FACT.
Since November 17, 1926, the petitioner, Herff & Dittmar Land Co., sometimes hereinafter referred to as the corporation, has been a corporation existing*964 and operating under and by virtue of the laws of the State of Texas, with its principal office and place of business in San Antonio, Texas.
The capital stock of the corporation was and is divided into three thousand shares without nominal or par value. All of this capital stock had been subscribed and fully paid for at the time the charter was filed with the Secretary of State of Texas.
The capital stock was fully paid by conveyance to the corporation of title to approximately 305 acres of land in Bexar County, Texas, known as the Camarillo Tract, the value of this land being fixed at $30,000 by the corporation and the owners of the land.
The Camarillo Tract was conveyed to the corporation by certain individuals and estates, through their representatives. It had been acquired by Ferdinand Herff and A. Dittmar, in a one-half undivided interest each, about the year 1883 and was acquired by the grantors by devise and/or descent prior to March 1, 1913, the heirs of Ferdinand Herff owning a one-half undivided interest and the surviving wife and heirs of A. Dittmar owning a one-half undivided interest.
Upon the organization of the corporation there was issued to the heirs of*965 Ferdinand Herff one half of the capital stock of the corporation and to Emmy Dittmar, surviving widow of A. Dittmar, and her two sons the remaining one half of the capital stock of the petitioner corporation. The stock in the petitioner corporation was owned by the individuals in the same proportion as their respective undivided interests in the Camarillo Tract.
On November 22, 1926, after the petitioner, Herff & Dittmar Land Co., had been incorporated and the stock fully subscribed, fully paid and issued, the same individuals and representatives of estates who had conveyed the Camarillo Tract referred to above conveyed to the corporation, by warranty deed dated November 22, 1926, a tract of land of approximately 242.61 acres in Bexar County, Texas, known as the Olmos Park Tract, for the agreed consideration of $617,500 to be paid pro rata to the grantors by the corporation. There were no stocks or securities of any kind delivered or agreed to be delivered to the grantors or their nominees or assigns by the corporation for the Olmos Park Tract.
The Olmos Park Tract had been acquired by Ferdinand Herff and A. Dittmar, in a one-half undivided interest each, about the year 1883*966 and was acquired by the grantors by devise and/or descent prior to March 1, 1913, the heirs of Ferdinand Herff owning a one-half *351 undivided interest and the surviving wife and heirs of A. Dittmar owning a one-half undivided interest.
It was contracted and agreed by and between the individuals and representatives of estates conveying the Olmos Park Tract, as set out above, and the officers and directors of the corporation that the $617,500 would be immediately paid pro rata to the individuals and estates conveying the land after the corporation had sold the land and as collections were made up to the agreed consideration of $617,500. The corporation did not give any note or mortgage or other written evidence of indebtedness of any kind showing any obligation on its part to pay $617,500 for the property.
On January 14, 1927, the corporation sold the Olmos Park Tract to the Northside Investment Co. for a total consideration of $700,000, payable over a period of years. No cash was paid the corporation at the time of sale.
At the time the Olmos Park Tract was conveyed to the corporation no books were being kept by the corporation, and no bookkeeping entries were made*967 of the transaction at that time, the only record kept at that time being the corporation minute book. This minute book shows that at the conclusion of the first meeting of the incorporators of the Herff & Dittmar Land Co., the first meeting of the board of directors was held, at which the following motion was passed:
On motion duly made and carried, the Herff and Dittmar Land Company accepted a deed dated November 22, 1926, whereby 242.61 acres of land, more or less * * * were conveyed for ten dollars ($10.00) and other valuable considerations received by grantors, to Herff and Dittmar Land Company.
It was in May 1929 that a complete set of books was opened for the corporation by a firm of accountants. The land transaction here involved between the corporation and the parties from whom the land was purchased was set up on the books of the corporation at the time the books were opened as follows:
| November 22, 1926, | ||
| Debit Real Estate: | ||
| Olmos Park Trace of 242.61 acres | $617,500 | |
| Credit. Due to Stockholders: | ||
| Dr. Adolph Herff | $51,458.34 | |
| August A. Herff | 51,458.34 | |
| William L. Herff | 51,458.33 | |
| Dr. John B. Herff | 51,458.33 | |
| Charles A. Herff | 49,400.00 | |
| Edward O. Herff | 2,058.32 | |
| Mrs. Zuline Herff | 51,458.33 | |
| Mrs. Emmy Dittmar | 307,926.68 | |
| Charles Dittmar | 205.82 | |
| John A. Dittmar | 205.83 | |
| Guido L. Dittmar | 205.83 | |
| Mattie Dittmar | 205.83 | |
| Total | 617,500 |
*968 *352 The explanation of the above entry made at the time on the corporation's journal is as follows:
To set up real estate sold, deeded and transferred to corporation by individual stockholders, November 22, 1926, stated value $650,000, less allowance for 5 per cent commission, $32,500; net sales price, $617,500.
The next entry on this page is dated January 14, 1927, and is as follows:
| Debit. Notes receivable of Northside Investment | ||
| Company No. 1 | $350,000. | |
| Debit. Notes receivable, Northside Investment | ||
| Company No. 2 | 350,000. | |
| Credit. Real estate, Olmos Park Tract | $617,500. | |
| Credit deferred income | 82,500. |
The explanation is, "Set up notes taken on sale of Olmos Park Tract, January 14, 1927,"
The corporation made payments of moneys pro rata to the individual grantors under the agreement as collected from the Northside Investment Co., with the exception of Emmy Dittmar, John A. Dittmar, Guido L. Dittmar, Charles Dittmar, and Mattie Dittmar, who were paid in full on January 14, 1930, and their accounts closed. However, the accounts of William L. Herff, John B. Herff, Edward O. Herff, Charles A. Herff, Adolph Herff, Zuline*969 Herff and August A. Herff were not closed and the corporation made payments to these individuals on the indebtedness in 1930 and 1931.
The individuals who deeded the Olmos Park Tract of land to the petitioner corporation made and filed their individual income tax returns reporting their pro rata part of the $617,500, as collected, on the installment plan.
The corporation reported its income from the transaction on the installment basis, based on a net cost to it for the land of $617,500 and a sale price of $700,000. For example, for the year 1927 the corporation reported a profit of $3,730.84, computed as follows:
| Sale of real estate - 242.61 acres | $700,000.00 | |
| Less: | ||
| Cost of land | $617,500.00 | |
| Commissions paid | 35,000.00 | |
| 652,500.00 | ||
| Gross profit | 47,500.00 |
$54,980.75/$700,000.00 X $47,500 = $3,730.84.
The corporation made similar computations of its net income from this particular transaction and made returns thereof for the other taxable years involved in these proceedings. There is no dispute as to the amounts collected by the corporation in any of the taxable years. The only dispute is as to how such collections should be *353 *970 treated. The Commissioner contends that there was no sale of the Olmos Park Tract of 242.61 acres from the stockholders to the corporation, but that the land was either conveyed to the corporation for stock or as paid-in surplus, and that in either case the basis for gain or loss to the corporation is the same as it would be for the transferors, viz, the March 1, 1913, value of the land. The commissioner's contention in that respect is contained in a statement attached to the deficiency notice, which reads in part as follows:
Your contention that the transfer of property does not come within the meaning of section 203(b)(4) of the Revenue Act of 1926 or section 112(b)(5) of the Revenue Act of 1928, has been denied.
The only hypothesis which serves to increase the basis of the land in the hands of the taxpayer is that of a sale, but that theory seems to be untenable. Inasmuch as the same parties who owned the first tract paid in for the stock, also owned the second tract; that the clear object of the creation of the corporation was to sell these two tracts of land; that although the corporate organization was complete in itself when the first tract was paid in for the stock the*971 full purpose of the incorporators was not achieved until the second tract was also transferred to the corporation; that for practical purposes the entire transaction occurred on November 22, 1926, and finally that dividends were declared as such and not as payment for the lands, it appears that the second tract also was paid in with the first tract for the stock or was paid in as surplus. In either case the result for tax purposes is the same.
The petitioner, Emmy Dittmar (Docket No. 63931), who owned an undivided interest in the Olmos Park Tract, received and reported her pro rata share of the $617,500 on her individual income tax returns on the installment sale plan and as capital net gain. For the calendar year 1929 she so reported $61,336 under section 101(a) of the Revenue Act of 1928. Respondent has determined a deficiency against the petitioner Emmy Dittmar on the basis that the income in question in 1929 was made up of dividends from the Herff & Dittmar Land Co.
OPINION.
BLACK: We have already stated the issues in this proceeding. The first and principal issue is whether the conveyance to the corporation of the Olmos Park Tract of land by the owners thereof, who*972 were also stockholders of the corporation, was a sale to the corporation for $617,500 net to the owners, or whether, as respondent contends, the land was conveyed to the corporation in payment of its capital stock, or as paid-in surplus to the corporation. In either of the latter events the respondent contends that the corporation would take the same basis for computing gain or loss as the transferors, which has been stipulated to be $750 per acre.
As pointed out in our findings of fact, the land was conveyed to the corporation by general warranty deed and the consideration stated in the deed was $10 and other valuable considerations. It is clear that *354 the other valuable considerations mentioned in the deed were not shares of the corporation. The evidence shows clearly that the entire capital stock of the corporation, 3,000 shares of no par value, was issued in payment for the Camarillo Tract of 305 acres. The affidavits required by the State of Texas showing payment for the capital stock as a condition precedent to issuing the corporation's charter, show that the Camarillo Tract was paid in for the corporation's capital stock and that the Camarillo Tract was worth*973 $30,000.
There is no evidence whatever that the Olmos Park Tract figured in any way as payment for stock. There is likewise no evidence that the owners of this tract of land intended to make a gift of the land to the corporation or intended to pay it in to the corporation as "paid-in surplus."
The facts in the instant case are not like those present in , where Sol Rosenbloom was the owner of a large stock of barrel whiskies which was stored in warehouses and had greatly appreciated in value, and Rosenbloom, in order to escape tax on their sale, transferred them to the Rosenbloom Finance Corporation, of which he was majority stockholder, as paid-in surplus, the corporation then claiming a stepped-up basis for gain or loss based on the market value of the whiskies at the time transferred to it by Rosenbloom. The Board sustained the contention of the taxpayer corporation in that case and held that by reason of the fact that the warehouse certificates were transferred to the corporation as "paid-in surplus" the corporation got a new basis and did not take the basis of cost of the transferor.
*974 The court, however, in , reversed the Board and held that the transfer of the warehouse certificates by Rosenbloom to the Rosenbloom Finance Corporation amounted to a gift, notwithstanding the forms adopted to show "paid-in surplus", and that the corporation on a future sale of the warehouse certificates took the same basis as the transferor. On that point the court said:
The taxpayer paid Rosenbloom no money, stock, or other consideration therefor. It was a voluntary transfer of property without consideration or compensation therefor, and the form it took involved no ownership by any third party, and, whatever form or semblance it took, in substance and reality it was a transfer with the aim of avoiding tax. In our judgment it was a gift.
In the instant case it is clear that there was neither a gift of the Olmos Park Tract nor a paying of it in as surplus to the corporation There was a sale of the land to the corporation by the stockholders for which they were to be paid and were in fact paid $617,500. We do not think it is of any controlling significance that some of the payments were denominated*975 "dividends" in the corporate resolutions directing their payment and some were denominated "distributions *355 of capital." The significant fact is that all such payments were understood by the parties to be payment of indebtedness which the corporation owed the stockholders and were treated as such by the stockholders in their income tax returns and by the corporation on its books. We think the facts of the instant case are very similar to those present in . In that case a majority stockholder, Curran, had deeded a building to the Con. P. Curran Printing Co., the deed reciting a consideration of $100, but the real consideration being an agreement by the corporation to pay Curran $150,000 for the building. Subsequently, the corporation declared a so-called dividend of $150,000, although providing specifically that none of the money could be withdrawn by the stockholders and that $76,500 of it should be credited to Curran on an open account of indebtedness which he owed the corporation. The Commissioner held that the $76,500 which was credited to Curran on the books of the corporation was a dividend and should have*976 been included in his return for taxation at surtax rates. Curran contended that, notwithstanding the payment was denominated a dividend on the books of the corporation, it was nevertheless a payment on the sale price of the building which he had sold to the corporation and that, since he had sold the building to the corporation for less than it had cost him, there with no taxable gain in the receipt of the payment of $76,500.
The court sustained Curran's contention and in doing so, among other things, said:
The form of a transaction is unquestionably pertinent evidence as to what the transaction really is, yet it is not always controlling. This is illustrated by the well-recognized rule that a deed, absolute in form, may be shown to be a mortgage. This same principle is true in applying the revenue statutes unless there is some forbidding expression or necessary implication in the particular statute. When this statute seeks to tax income as derived from corporate dividends, obviously, it means income derived from corporate earnings which accrue to the stockholder solely because of his relation as such to the corporation. *977 It has no design to so tax money paid to the taxpayer as the purchase price of property. The form is not conclusive evidence that the payment really and essentially and solely was a corporate dividend. , et seq., . Even the evidentiary force of form is weakened where, as here, the transaction includes elements unusual or opposed to a transaction which the form would ordinarily or necessarily represent.
So, giving effect to all the evidence in this case, we hold that the transfer of the Olmos Park Tract to the corporation was a sale and that the price agreed to be paid by the corporation to the owners of the land was $617,500 net to them. Cf. ; . The second issue is whether the payments made to Emmy Dittmar *356 in the taxable year in question are taxable as dividends, as determined by the Commissioner, or were payments to her as a part of the purchase price of the Olmos Park Tract and taxable, to the extent of profits thereon, as capital net gain. This issue*978 is necessarily determined by what we have already held on issue 1.
Therefore on issue 2, we hold in favor of the taxpayer.
Decision will be entered under Rule 50.