*251 Decision will be entered under Rule 50.
1. A judicial decision that a taxpayer did not acquire a property in the course of a statutory reorganization and is not entitled to use of the predecessor owner's basis, held, not to render the amount of such property's cost to it, which cost the Commissioner had determined and used as basis, res judicata.
2. A taxpayer, having put in issue only its right to use of a predecessor owner's basis of a property in a proceeding decided adversely to it by the Board of Tax Appeals, held, not collaterally estopped from putting in issue the determined amount of cost to it in attacking depreciation and depletion deductions allowed by the Commissioner for a subsequent year.
3. The taxpayer corporation was organized to continue the business of insolvent corporation X pursuant to a preconcerted plan whereby it issued all its stock to the preferred shareholders, bondholders, and officers of X, assumed specified obligations, and acquired from the receiver and creditors of X numerous properties which had belonged to X. It purchased some from the receiver and purchased or leased some from creditors who had acquired them at foreclosure sales. *252 It made bids and paid recited prices agreed upon in advance by all interested parties to the plan, and it issued some stock and acquired redemption rights and creditors' deficiency judgments without recited consideration, and part of the deficiency judgments were applied in satisfaction of the recited price of assets purchased by it from the receiver, as contemplated by the plan.
(a) On the evidence, held, that the bids and recited contract prices are not determinative of the cost of the specific property to which they applied, but that the aggregate consideration was paid for the assets as a whole and should be apportioned as cost among them on the basis of their relative values.
(b) On the evidence, held, that the value of shares issued for the aggregate properties is equal to the properties' fair market value less the amount of cash paid and obligations assumed, and that the taxpayer's cost of the aggregate assets is the shares' value plus the amount of cash paid and obligations assumed.
*348 The Commissioner determined the following deficiencies in petitioner's taxes for the fiscal years ended November 30, 1940, and 1941:
| Declared | |||
| Year | Income tax | value excess | Excess profits |
| profits tax | tax | ||
| 1940 | $ 28,122.88 | $ 4,917.04 | |
| 1941 | 58,673.74 | $ 158,081.83 |
*349 Petitioner assails the bases used in computing depreciation and depletion deductions, charging error in the amounts determined as the cost bases of assets which it acquired at organization pursuant to a plan whereby it issued shares, paid cash, and assumed obligations in taking over the business and assets of an insolvent corporation then in receivership. In computing deductions for the depreciation and depletion of certain of such assets the Commissioner used as bases the costs of the assets determined by reference to the recited prices and foreclosure bids made pursuant to the plan. Petitioner contends that the fair market value of the assets at acquisition is their cost, since under the plan it paid an agreed amount of cash, assumed certain liabilities, and issued all of its*254 stock as consideration for the assets of the insolvent corporation as a whole, and that the value of the assets is the only evidence of the value of its stock. Respondent argues that the issue raised is res judicata because the Board of Tax Appeals held in respect of depreciation and depletion deductions for the same assets in a prior year that petitioner was not entitled to use of its predecessor owner's bases, there having been no statutory reorganization. He contends, further, that cost to petitioner was expressly raised in the prior proceeding. In the alternative, he denies that he erred in determining the amount of petitioner's cost of the assets. Other assignments of error were abandoned.
FINDINGS OF FACT.
Petitioner, a Nevada corporation, with principal office at Portland, Oregon, is engaged in the logging and lumber-manufacturing business. It has consistently prepared its income tax, declared value excess profits tax, and excess profits tax returns on an accrual basis, and for the fiscal years ended November 30, 1940 and 1941, it filed them with the collector of internal revenue for the district of Oregon. Petitioner was organized on March 26, 1935, in accordance*255 with a plan submitted by the receiver of the Pacific Spruce Corporation (hereinafter called Pacific) and approved by the District Court of Oregon. Under this plan it acquired the assets and continued operation of the business of Pacific and of Pacific's wholly owned subsidiary, the C. D. Johnson Lumber Co.
Pacific was formed in 1921 to take over and operate the properties of the United States Spruce Production Corporation (hereinafter called U. S. Spruce), which had been created during World War I to provide airplane manufacturers with proper lumber and was owned by the United States Government. These properties comprised a sawmill and mill site, a timber tract, booming grounds, and appurtenances near Toledo, Oregon. By an executory contract of purchase Pacific acquired the right to immediate use and possession, but title was to remain in U. S. Spruce until all installments of the purchase *350 price of $ 2,000,000 should be paid. Pacific began operation in 1922, and in subsequent years it acquired additional timber tracts, logging railways, an electric sawmill, a planing mill, dry kilns, manufacturing facilities, and modern equipment. In 1931 it owned the most efficient*256 mills in the area; it owned or had access to the best quality timber in the northwest; and transportation by rail or water was readily available for its operation and the marketing of its products.
Pacific's capital stock was represented by 27,090 1/2 preferred shares of the par value of $ 100 each and 485,805 common shares of no par value. A preferred share entitled the holder to a 7 per cent cumulative annual dividend out of surplus or profits, and in case of voluntary liquidation to $ 110 out of available assets. It was subject to redemption at any time on 30 days' notice and payment of $ 110. It entitled the holder to 10 votes at stockholders' meetings; each common share entitled the holder to one vote. On October 1, 1924, Pacific issued $ 3,500,000 par value sinking fund gold votes (hereinafter called bonds) which bore 6 1/2 per cent interest and were secured by a first mortgage on its timber lands, logging railroad, and related facilities and equipment and by its rights under the executory purchase contract with U. S. Spruce.
After January 1, 1929, Pacific paid no dividends on its preferred shares, and on October 1, 1930, defaulted in the payment of interest on its bonds. *257 Depressed business conditions throughout the United States during the winter of 1930-1931 adversely affected lumber manufacturers and brought about the insolvency of Pacific and its subsidiary. On February 5, 1931, a shareholder and a shareholding creditor filed a bill of complaint in the United States District Court for Oregon, alleging Pacific's insolvency and praying the appointment of a receiver. The allegations being admitted, the court appointed Ralph H. Burnside, an experienced lumber man. He immediately qualified, and continued operation of the properties until his discharge by the court on January 13, 1936. His operations from December 1, 1935, however, were on account of petitioner, which acquired the properties on that date.
When the receiver was appointed, Pacific held as title owner about 15,000 acres of timbered and cut-over lands in Lincoln County, Oregon, containing an estimated 600,000 M feet of timber, a logging railroad, and related facilities and equipment. Under the executory purchase contract with U.S. Spruce, it had possession, use, and a purchaser's equity in a sawmill and mill site, some unlogged timber, booming grounds and appurtenances at or near Toledo, *258 Oregon. Of the purchase price, $ 436,108.33 remained to be paid. Its interests in all of the above mentioned properties were mortgaged to secure its bonds, of which $ 2,421,100 par value, with interest from October 1, *351 1930, were outstanding and unpaid. In addition it owned a standard gauge railroad 24 1/2 miles in length serving the Toledo mill, and another railroad 14 miles in length, both mortgaged to the Consolidated Securities Co., acting for the Southern Pacific Railroad, to secure the payment of 5 1/2 per cent notes in the amount of $ 1,000,000, all unpaid; both railroads were also subject to a second mortgage securing the bonds. Pacific also owned two cargo vessels, barges, tugs, and floating equipment, subject to a first mortgage securing an unpaid balance of $ 70,000 of their purchase price and to a second mortgage securing the bonds. It owned free of encumbrances an inventory of logs and lumber, carried on its books at $ 700,000; miscellaneous mill, logging, and office equipment; bills and accounts receivable of $ 140,000; and stocks, bonds, and miscellaneous investments carried on its books at $ 150,000 and some cash. In addition to the bonds and other obligations*259 mentioned, Pacific and its subsidiary owed $ 284,000 to banks for loans; $ 405,995.61 to the Pendleton Timber Co. for timber purchased under a contract; other unsecured debts aggregating about $ 55,000, and delinquent taxes and penalties of about $ 145,000 due to Lincoln County.
After appointment of the receiver, C. D. Johnson, the president and manager of Pacific, and his son, Dean Johnson, vice president and assistant manager, remained in Pacific's employ and entered into protracted negotiations with creditors in efforts to bring about a reorganization that would permit a continuation of the business. They deemed it essential that the various properties be held together as an operating unit, that the financial structure be adjusted to reduce fixed charges, and that the experienced managerial staff be retained. Creditors' representatives in general agreed that their interests could be best protected by this policy, and in negotiations this objective was kept in view. The mortgagee of the two cargo vessels, however, promptly instituted libel proceedings, under which the ships were sold for $ 13,740.76 less than the judgment award, and claim for this deficiency was filed in the *260 receivership proceeding on November 7, 1931.
On July 15, 1931, the receiver filed his first report with the court, expressing the view that the value of Pacific's assets was inadequate to pay off the secured obligations. A bondholders' protective committee, having been formed by holders of over 90 per cent of the bonds, on October 9, 1931, had the trustees for the bondholders petition to intervene in the receivership proceeding and to foreclose on the mortgaged properties because of default in the payment of bond interest, taxes on the mortgaged properties, and purchase price installments due on the properties bought from U. S. Spruce. By court order of December 7, 1931, they were allowed to intervene for foreclosure *352 purposes, and on December 15, 1931, filed claim for the principal amount of $ 2,421,100 and for unpaid interest. On July 28, 1932, bondholders not represented by the committee were permitted to intervene. The Consolidated Securities Co. filed claim for the $ 1,000,000 due it; other creditors filed claims, and the Pendleton Timber Co. procured from the court on May 22, 1933, an order canceling its contract to sell timber to Pacific. On the same date U. S.*261 Spruce filed a foreclosure bill for the balance of $ 436,108.33, with interest, due under its executory sales contract with Pacific. And among other complications a dispute arose between U. S. Spruce and the bondholders' trustees concerning the application of the former's lien to certain assets which Pacific had acquired after making the contract of purchase. This controversy was decided by a special master in 1934, but U. S. Spruce was dissatisfied with his decision and proposed to appeal therefrom after a final decree should be entered.
During this time the receiver was continuing business activities, but sustaining operating losses, and the Johnsons were actively prosecuting negotiations with creditors for some settlement that would permit of an advantageous reorganization. They held conferences with the bondholders' committee in Chicago and with the bondholders individually; with War Department officials representing U. S. Spruce in Washington; with officials and attorneys of the Southern Pacific Railroad in New York; with the tax officers of Lincoln County; and with others. Their efforts produced results. The county officials agreed to accept $ 106,663.23 in satisfaction*262 of unpaid taxes and penalties, and in June 1934 the bondholders' committee tentatively agreed on a written plan of reorganization to which the other large creditors had already assented in principle. Under this plan a corporation to be formed was to assume certain obligations and for stipulated considerations was to acquire Pacific's encumbered assets from the creditors after foreclosure and unencumbered assets from the receiver. The problem most difficult of solution was the division of the new corporation's stock among participants. It was originally proposed that the bondholders receive 20 per cent of the common shares and that 80 per cent be distributed among Pacific's preferred shareholders and the managing staff. The bondholders objected that this division gave them nothing on account of unpaid interest, and to meet this objection, it was finally agreed that 40 per cent of the common shares be issued to them, 30 per cent to preferred shareholders, and 30 per cent to the managing staff. Pacific's common shareholders were offered the right to purchase at $ 5 one common share of the new corporation's stock for each ten shares of Pacific held by them, but none were interested*263 in doing so, and they got nothing.
*353 After minor modifications the plan was agreed to by all interested parties, and on January 9, 1935, it received the court's approval. Pursuant to its terms the following steps were taken by the several participants: Petitioner was organized on March 26, 1935, and authorized to issue 6,291 preferred shares, redeemable at $ 100 each, and 84,000 class A common shares and 126,000 class B common shares, both of no par value. It was required that 320 preferred shares be retired the first year and a larger number in succeeding years, reaching 540 in the eighth year. No dividends were payable on the common shares until all preferred shares should be retired. Preferred shareholders were entitled to no vote unless their rights as shareholders should be involved. Each common share entitled the holder to one vote. On April 8, 1935, the court entered its order canceling Pacific's contract with U. S. Spruce, and on May 31, 1935, U. S. Spruce sold to petitioner the properties covered by it for the unpaid balance due from Pacific, then $ 436,108.33, payable in quarterly installments with 4 per cent interest over a nine-year period. In July 1935 *264 the properties mortgaged to secure payment of the bonds, then outstanding in the face amount of $ 2,298,200, were sold under foreclosure to a trustee of the bondholders' committee for $ 1,500,000, and there was entered a deficiency judgment for $ 1,647,958.62, including interest, which judgment was assigned to petitioner. The two railroads mortgaged to the Consolidated Securities Co. for payment of the notes of $ 1,000,000 were sold under foreclosure on June 29, 1935, to the Anglo-California National Bank for $ 500,000, and a deficiency judgment for $ 756,618.50, including interest, was entered, and then assigned by the creditor to petitioner. The bank leased the railroads to petitioner for 50 years for a rental determinable by reference to the quantity of logs hauled. On November 23, 1935, the receiver sold at auction to petitioner Pacific's remaining free and unmortgaged assets, including equities of redemption, for $ 700,000, of which $ 200,000 was payable in cash and $ 500,000 by credit on the deficiency judgments which had been assigned to petitioner. Petitioner's directors had authorized a bid up to $ 2,000,000 for these properties, but, as in the case of the bids by the *265 bondholders' trustee and the Anglo-California Bank, the figure bid was a somewhat arbitrary amount which, after discussion, the parties to the reorganization plan considered enough to satisfy the court, to preclude other bids, and to leave large deficiency judgments for use under the plan. Petitioner assigned the bond foreclosure sale to the bondholders' corporation and the redemption rights in the railroads to the Anglo-California Bank, as agreed.
Pursuant to the plan as approved, petitioner assumed the payment of Pacific's compromised tax liability to Lincoln County; assumed bank debts and other obligations which had been compromised *354 in the amount of $ 58,588.14, issuing its notes therefor payable serially over five years; and assumed all other unsettled liabilities of Pacific. A new corporation, to which the bondholders had conveyed the assets and judgment awarded them under the foreclosure proceeding, assigned to petitioner the judgment of deficiency on the bonds and contracted to sell to petitioner all the assets (which included the subsidiary's stock, although the subsidiary's charter had been forfeited for nonpayment of license fees at the end of 1933) for $ 1,669,100, *266 payable without interest in annual minimum installments over a period ending in 1948. Petitioner issued to the bondholders' corporation 6,291 preferred and 84,000 class A common shares of its stock. It issued 63,000 class B common shares to Pacific's preferred shareholders and 63,000 class B common shares to C. D. Johnson as "organization manager." Johnson had owned 1,407 preferred and 40,135 common shares of Pacific and had rendered valuable services to Pacific over the years and during the receivership. To finance its purchases, petitioner borrowed $ 250,000 from the Federal Reserve Bank of San Francisco, California, securing payment by assignment of its rights under its purchase contracts with the bondholders' corporation and U. S. Spruce and its lease contract with the Anglo-California Bank.
On December 2, 1935, the court approved the receiver's contracts and conveyances and directed that the business be conducted on and after December 1, 1935, for the account of petitioner. On that date the fair market values of the several properties previously owned and held by Pacific and acquired by petitioner were as follows:
| Acquired under U. S. Spruce contract | $ 1,878,594.92 | |
| Plant and equipment | $ 1,693,596.30 | |
| Timber and land | 184,998.62 | |
| Acquired under bondholders' corporation contract | 1,600,189.59 | |
| Railroad and logging equipment | 348,015.75 | |
| Timber and land | 1,252,173.84 | |
| Acquired by purchase from receiver, miscellaneous assets | 867,291.46 | |
| Total fair market value | 4,346,075.97 |
*267 Petitioner's opening balance sheet showed total assets of $ 5,542,823.49. Timber and timber lands acquired from U. S. Spruce and the bondholders' corporation appear at $ 83,954.74 and $ 1,669,100, respectively. The former figure is based upon appraisals, made by an appraisal company in 1934 and 1935, with adjustments for depreciation; the latter figure is the amount payable under the contract. Other assets were carried at estimated values. "Real Estate, Plant, Equipment & Facilities," comprising the logging plants and equipment, were entered on the opening balance sheet at a total of $ 3,061,274.09. *355 No figures on the balance sheet are related to the prices bid for assets at the foreclosure and receiver's sales.
On December 1, 1935, petitioner's debts and obligations aggregated $ 2,569,233.23 in amount. They comprised the $ 1,669,100 due the bondholders' corporation, $ 382,344.04 due U. S. Spruce, the loan of $ 250,000 from the Federal Reserve Bank, notes for $ 45,601.21 due other banks, accrued and delinquent taxes of $ 138,590.70, and lesser amounts for interest, wages, freight, etc. The fair market value of petitioner's assets exceeded the total amount of its obligations*268 by $ 1,776,842.74. On the opening balance sheet capital account was charged with $ 629,100 for the 6,291 preferred shares issued, with $ 840,000 for the 84,000 class A common shares, and with $ 1,260,000 for the 126,000 class B common shares. The shares were not listed on any stock exchange; there were no sales, bids, offers, or advertisements for them in 1935 or 1936; and there had been no trading in Pacific's shares, although a few had been transferred in the settlement of estates. On an estate tax return E. E. Johnson, then vice president of petitioner and executor of the estate of his father, C. D. Johnson, who died May 2, 1940, reported the decedent's class B common shares of petitioner at a value of 2 cents each. The revenue agent recommended that the return be accepted as filed.
By use of book figures as bases, petitioner computed and claimed deductions of $ 250,152.07 for depletion of timber properties and of $ 190,630.96 for depreciation of plants and equipment, for the fiscal year ended November 30, 1936, and like deductions of $ 225,081.51 and $ 196,130.13, respectively, for the fiscal year ended November 30, 1937. The Commissioner recomputed and allowed lesser deductions*269 under the view that the depletable and depreciable properties were not acquired by tax-free exchanges in the course of a statutory reorganization; that petitioner's bases for them were cost to it, which cost he determined to be $ 900,743.94 for the depreciable assets, $ 1,340,695.12 for the depletable assets, and $ 828,679.17 for the unmortgaged assets. He apportioned the costs of the several items or groups by reference to the contracts' recited considerations or purchase bids and the book values, with this explanation in reference to the mortgaged assets:
* * * all current assets * * * have been taken at the values assigned to them in your books, totalling $ 670,572.79 and the entire balance of the total cost amounting to $ 158,106.38, has been apportioned to the investments and capital assets so acquired, in proportion to the values assigned to them in your books.
In a proceeding before the Board of Tax Appeals, Docket No. 104938, petitioner attacked the deductions allowed on account of depreciation and depletion of the former Pacific properties for the fiscal years ended November 30, 1940 and 1941. It assigned error in the *356 Commissioner's determination that it did not*270 acquire the assets by tax-free exchanges in the course of a statutory reorganization and that its bases for such properties were cost to it, "as determined by the amount of obligations assumed and by arbitrary amounts bid at Receiver's sale, and not the depreciated cost thereof to petitioner's predecessor, Pacific Spruce Corporation." Consequential errors were assigned in the Commissioner's disallowance of the deductions as claimed on the returns. By a final assignment petitioner complained of:
Error of the Commissioner (after having erred in holding that petitioner's basis for gain or loss and depreciation and depletion of properties acquired in the reorganization was determined by obligations assumed and wholly arbitrary amounts bid, as set forth in Second above) in his allocation of these amounts among the various properties involved, arbitrarily and without regard for real and comparative values of the properties.
In support of this assignment petitioner alleged in its petition that:
The wholly arbitrary and capricious allocation made by the Commissioner of the total of obligations assumed and bids made in acquisition of properties in the course of the said reorganization proceedings, *271 as representing the cost to petitioner of the respective properties, fails to reflect the true and comparative values of the properties or their real cost to petitioner.
The Commissioner denied that he "made any arbitrary and capricious allocation."
In his opening statement at the hearing the Commissioner's counsel stated:
* * * There is no issue in the pleadings as to what is the value of the assets acquired, assuming that it is not a reorganization. * * * I merely make the point for the reason, and in anticipation that the Petitioner might undertake to offer evidence as to the values of the properties acquired * * *.
When petitioner's counsel later offered in evidence petitioner's balance sheet of December 1, 1935, "to show * * * the net worth of the new corporation which had taken over all the assets of the old," respondent's counsel objected that the document was incompetent to prove values. The objection was sustained, but the document was thereafter admitted as proof of "book values" and with the understanding that it was not "offered for the purpose of going to the value of the properties that were acquired by this petitioner."
After the hearing, but prior to the filing*272 of briefs, petitioner made motions to reopen the proceeding for the taking of "further testimony upon the question of the fair market value of petitioner's properties" and for permission to file an amended petition, in which it was charged by a new assignment that the Commissioner erred:
* * * in failing and refusing to hold that the basis * * * of said properties [acquired on organization] was not less than their fair market value on December 1, 1935, which fair market value was not less than $ 5,587,673.57.
*357 In support of these motions petitioner contended in accompanying briefs that the petition as filed "also raises the fact question as to the real value of the properties"; that four decisions of the Supreme Court rendered on February 2, 1942, and after the hearing on September 5, 1941, to wit: ; ; ; and ,*273 made "definite for the first time the rule as to the proper basis of assets in the hands of the acquiring corporation where the transactions by which they were acquired do not constitute a tax-free reorganization," and that "further testimony on this issue of the fair market value of its properties" should be admitted. The motions were denied on May 21, 1942.
The Board of Tax Appeals decided on October 13, 1942, that petitioner had not acquired the assets in a statutory reorganization and was not entitled to Pacific's bases. . The Commissioner's determinations of deductions for depreciation and depletion were sustained, it being noted that:
* * * In its petition, petitioner did not (except as affected by the reorganization issue) assail the figures which the respondent had used as bases, nor did it at the hearing propose to show by evidence what figures should be taken as cost bases in lieu of those used by the Commissioner if it were held that no statutory reorganization had occurred. This was expressly referred to by respondent's attorney in his opening statement, and no attempt was made by petitioner, *274 either by amended pleadings or otherwise, to establish bases other than those used by respondent. It was contended only that the refusal to recognize a reorganization and to use the predecessor's basis in computing the deductions was error, thus leaving it inferable that, if it were held that no statutory reorganization had occurred, no attack would be made upon the figures used. * * *
* * * Under the circumstances, it is easy to believe that petitioner * * * acted upon a considered judgment in omitting to assail the determination except upon the ground of a statutory reorganization.
On November 12, 1942, petitioner filed a motion that its previously tendered amended petition be accepted; that the Board reconsider and withdraw that portion of its opinion sustaining the Commissioner's determination of deductions for depreciation and depletion; and that the case be reopened for further testimony on cost basis. This motion was denied the following day, for the expressed reason that: "* * * There was no issue raised or tried as to amount of petitioner's cost basis of the depreciable and depletable assets * * *." Decision was entered in accordance with the Board's report of December*275 9, 1942, and no petition for appellate review was filed.
On its income tax, declared value excess profits tax, and excess profits tax returns for the fiscal years ended November 30, 1940, petitioner *358 deducted $ 366,003.01 for depletion and $ 202,089 for depreciation. The Commissioner disallowed $ 47,803.20 and $ 122,688.47 thereof, respectively. On the returns for the fiscal year 1941 petitioner deducted $ 428,755.55 for depletion and $ 255,390.76 for depreciation. The Commissioner disallowed $ 47,400.42 and $ 124,281.88 thereof, respectively. In recomputing depletion and depreciation the Commissioner determined the following bases as of December 1, 1935, for assets acquired by petitioner at the time of its organization:
| Under U. S. Spruce contract | $ 397,802.73 | |
| Plant and equipment | $ 384,457.17 | |
| Timber and land | 13,345.56 | |
| Under bondholders' corp. contract | 1,722,101.33 | |
| Railroad and logging equipment | 395,120.70 | |
| Timber and land | 1,326,980.63 | |
| By purchase from receiver, miscellaneous assets | 891,408.69 | |
| Total bases determined | 3,011,312.75 |
Without assessment of the deficiencies determined, petitioner paid the full amount of them, viz., $ *276 249,795.49, to the collector of internal revenue on June 26, 1947, to prevent the accumulation of interest.
OPINION.
Petitioner assails the Commissioner's computation of depreciation and depletion deductions for the fiscal years 1940 and 1941 by the use of cost bases which reflect the foreclosure bids and contract prices (with some apportioning adjustments) for properties of Pacific which it acquired at the time of organization. It contends that the properties' cost to it was an over-all price, consisting of cash paid, obligations assumed, and all its own stock issued pursuant to the reorganization plan, and that the stock's value is determinable by reference to the fair market value of the properties on December 1, 1935, the date of acquisition. The parties have stipulated the fair market value of the several groups of assets on that date, subject to respondent's objection that such evidence is immaterial to any issue properly raised. Respondent contends that petitioner's bases for the properties are res judicata, and that his determination in respect thereof should be sustained on this account without review. Of the 96 pages of respondent's brief, only 5 or 6 are devoted*277 to questions other than the application of the doctrine of res judicata. We shall consider that contention first.
(1) Petitioner was formed to acquire the assets and continue the business of Pacific which was adjudged insolvent in February 1931. A receiver continued its operation, however, and, after protracted negotiations, its officers procured the agreement of shareholders, *359 creditors, and other interested parties to a plan of reorganization which received court approval on January 9, 1935, and was carried out in detail by December 1. Pursuant to this plan petitioner acquired properties, assumed liabilities, and issued all its shares to Pacific's former bondholders, preferred shareholders, and manager. For 1936, as for the years in issue, the Commissioner determined the amounts deductible as depletion and depreciation on properties so acquired by using as basis a cost to petitioner which he computed by reference to foreclosure bids and contract figures. Petitioner contested this action in a proceeding before the Board of Tax Appeals, contending that it acquired the properties by tax-free exchanges in the course of a statutory reorganization, and that its bases*278 were those of Pacific. Holding that there was no statutory reorganization and that petitioner was not entitled to Pacific's bases, the Board of Tax Appeals sustained the Commissioner's determinations of deficiency, , and on that decision respondent now bases his plea that the present issue is res judicata.
In a recent opinion of the Supreme Court, , Justice Murphy expounded the doctrine of res judicata, particularly with reference to issues of tax law similar to those here involved. Having noted that in general the judgment of a competent court on the merits of a cause of action binds the parties and their privies:
* * * "not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." * * *,
he carefully distinguished the effect of such judgment on a second action between the same parties based upon a different cause or demand, *279 saying:
* * * In this situation, the judgment in the prior action operates as an estoppel, not as to matters which might have been litigated and determined, but "only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered." . And see ; ; . Since the cause of action involved in the second proceeding is not swallowed by the judgment in the prior suit, the parties are free to litigate points which were not at issue in the first proceeding, even though such points might have been tendered and decided at that time. * * *
Such is the situation, he added, if a taxpayer raises an issue similar to one already adjudicated in a proceeding brought by him in respect of a different tax year. In such event:
*360 * * * the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which*280 were actually presented and determined in the first suit. * * *
* * * *
* * * If the legal matters determined in the earlier case differ from those raised in the second case, collateral estoppel has no bearing on the situation. See . * * *
As this proceeding involves depreciation and depletion bases for a year different from that involved in the prior case, respondent must rely on collateral estoppel as a bar to further judicial review. Accepting this approach, he argues primarily that the prior issue was the basis of the same properties here involved; that this basis, once adjudicated, is a constant factor for succeeding tax years; and that, since in the prior holding the amount of basis was implicitly a part of the decision, all elements in its computation were necessarily part and parcel of the issue decided. He argues alternatively that, besides assigning error in the Commissioner's failure to recognize petitioner's acquisition by tax-free exchanges and the consequent right to use of Pacific's basis, petitioner expressly put in issue in the prior proceeding the value of the properties*281 at acquisition and offered some evidence of such value in support of a greater basis than that determined.
As we construe the opinion in Sunnen and other pertinent precedents, the application of the doctrine of collateral estoppel to bar review of the issue now raised depends upon the answers to two questions: (1) Does a claim for increased basis founded solely on an asserted right to use of a predecessor owner's cost put in issue the factors entering into a determination purporting to reflect the claimant's cost? (2) If it does not, were such factors put in issue by separate assignment or otherwise in petitioner's prior proceeding?
The first question has been answered in the negative by decisions involving factual situations which render them singularly pertinent. A claim for increased basis may be founded on more than one theory of right, and each such theory, when separately presented for court review, constitutes a separate issue. Such was the holding of the Court of Claims in ; . There it appeared that the plaintiff in a prior proceeding*282 had attacked a determined basis, computed as cost to it, on the theory that it was entitled to use as basis the assets' cost to a predecessor owner, . After an adverse decision by the Board of Tax Appeals the plaintiff attacked the same basis, used in computing the depreciation deduction for a subsequent year, on the theory that the cost to it was determined in an insufficient amount. In rejecting the Commissioner's plea of res judicata, the Court of Claims reasoned that the Board's judgment was conclusive only as to "questions presented and decided," and, therefore, did not *361 preclude the plaintiff in a second action from furnishing additional evidence to support the new demand. It reasoned that the Board had held under the issue previously raised that there was no reorganization, and hence:
* * * The plaintiff, having taken a different view of the transaction, had introduced no such proof [of cost to itself] and, therefore, and for this reason only, its claim for depreciation was denied. It would be manifestly inequitable to hold that under such circumstances this would preclude it from introducing proof of such cost in a *283 suit to recover taxes for later years.
Conversely, the Circuit Court of Appeals for the First Circuit held in , that an adjudication of the taxpayer's cost as a property's basis was no bar to a subsequent attack on the same basis under the theory that the taxpayer was entitled to use of the predecessor owner's cost. The court expressly based its holding on the ground that:
* * * the question whether the transaction was a tax-free reorganization, as affecting the determination of the taxpayer's proper basis for depreciation, was not "actually litigated and determined" in , and therefore that the taxpayer was free to press this issue as the foundation of a claim for refund of an alleged overpayment for the tax year now in question.
While these two decisions were rendered prior to the decision in , their holdings and rationale seem in harmony with the views of the Supreme Court. Justice Murphy stressed that:
* * * where two cases involve income taxes in different*284 taxable years, collateral estoppel must be used with its limitations carefully in mind so as to avoid injustice. It must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged. Tait v. Western Md. R. Co., supra [289 U.S. 620]. If the legal matters determined in the earlier case differ from those raised in the second case, collateral estoppel has no bearing on the situation. See . * * *
We are of opinion that it has no bearing on the situation here in so far as the prior proceeding involved the effect of the reorganization on petitioner's basis.
There remains for consideration, however, whether or not the petitioner's cost of the assets was an issue specifically raised and decided in the prior case. In addition to his contention that such an issue was necessarily included in a claim for increased basis, respondent also argues that it was raised by a separate assignment, which petitioner's counsel mentioned at the trial and *285 implicitly recognized as raised by his tender of some evidence on the subject -- admittedly meager evidence. After a careful review of the record in the prior proceeding we can not agree. The final assignment of the petition, *362 it is true, refers to the value of the properties when petitioner acquired them. But the value determined is not attacked; only its allocation among the several properties is questioned. In their introductory remarks counsel for each party stated his concept of the issues, and petitioner's counsel asserted that, even if his primary contention should be sustained, there would still remain the question of how to value the properties for purposes of depreciation and depletion; later, that petitioner was not bound by bids in valuing the properties. Respondent stresses these statements as supporting his contention that the value of the assets at acquisition was previously in issue as a basis factor.
We have analytically reviewed the protracted opening statements, and, although somewhat loosely worded, the remarks stressed would seem to refer to the final assignment of error in allocation of the amount determined as total basis among the several assets*286 rather than to the total figure itself, which petitioner now attacks. In any event, an issue can be raised only by proper assignment in a petition or amendment thereto, not by reference in the opening statement of petitioner's counsel. This is a fortiori true if, as here, respondent's counsel denies that any such error has been put in issue and later objects to proffered evidence on the ground that it relates to the alleged error not properly raised.
We are not, however, solely dependent upon a present construction of the petition and counsel's statements. After the hearing of the prior proceeding petitioner tendered an amended petition in which the Commissioner's failure to use the fair market value of the assets on December 1, 1935, as basis was clearly assigned as error, and made a motion to reopen the case for the admission of testimony regarding such fair market value. The amended petition was rejected and the motion denied. After the Board's opinion was rendered, petitioner again tendered the amended petition and motion, and moved further for a reconsideration and rehearing. The Board denied these motions for the stated reason that "there was no issue raised or tried*287 as to amount of petitioner's cost basis." This denial was consonant with the statement in its opinion that no error was raised "except upon the ground of a statutory reorganization."
We are of opinion and hold that the error assigned in this proceeding relating to the cost of petitioner's assets as basis presents an issue distinct from that raised and decided in the prior proceeding, and that petitioner is not collaterally estopped from raising such issue here.
(2) In assailing the amounts determined as its cost of the several assets, petitioner charges respondent with improperly using the bids at the receiver's sales and the contract prices, which amounts, it argues, were prearranged arbitrarily to fit into the unitary plan for reorganization *363 of the business and hence lack substantive significance. It contends that the group of Pacific's assets which it acquired should be treated as a unit, and that the consideration paid should be held applicable to them as a whole; that this consideration consisted of cash, the assumption of obligations, and the issuance of all its shares; and that, as the fair market value of the shares can only be measured by the fair market value *288 of the assets, less cash and obligations, the stipulated value of such assets should be accepted as its cost, and hence its basis. Mathematically, of course, the decrease in share value because of the cash and assumed obligations would be, under this theory, exactly matched by the addition of these amounts to share value as elements of cost. The parties have stipulated the total value of the acquired assets on December 1, 1935, to be $ 4,346,075.97, and have allocated it among the several constituent groups. The Commissioner determined that in petitioner's hands the total cost or bases of the assets aggregated $ 3,011,312.75.
There is ample precedent to support petitioner's proposed method of basis computation if the facts shown warrant its application. It is settled that the cost of property acquired for shares of stock is the fair market value of the shares, and if, as here, a corporation's entire stock is issued for the acquisition the value of the properties acquired, with the addition of any cash paid and obligations assumed, may be accepted as a measure of the value of the shares and hence of the cost of the properties, in the absence of sales or other evidence of share value. *289 ; ; ; ; affd. (C. C. A., 2d Cir.), ; certiorari denied, . It is likewise recognized that a bid or contract price is not necessarily cost if circumstances vest the figure with a purely arbitrary or perfunctory character, ; ; , and if the total consideration is paid for a mixed aggregate of assets, its allocation among the several properties acquired should be based upon the relative value of each item to the value of the whole. Cf. ; .*290
The facts established justify an application of the above principles. In brief outline, petitioner acquired Pacific's assets under the reorganization plan and, in so doing, issued all of its stock, as prearranged, to the bondholders' corporation, Pacific's preferred shareholders, and Johnson. It assumed the payments of delinquent taxes on the properties and Pacific's unpaid debts in the amounts of $ 106,663.23 and $ 58,588.14, respectively. It bought from U. S. Spruce the properties *364 covered by the canceled contract for a promise to pay $ 436,108.33. It bought from the bondholders' corporation the assets mortgaged to secure the bonds for its obligation to pay in future installments $ 1,669,100, a figure equal to the difference between the par value of its preferred shares issued to the bondholders' corporation ($ 629,100) and the unpaid principal of the bonds outstanding ($ 2,298,200). It leased the railroads from the bank which had acquired them by foreclosure. And it bought from the receiver Pacific's unencumbered assets for a bid price of $ 700,000, of which $ 500,000 was satisfied by deficiency judgments against it which the judgment creditors had assigned it pursuant*291 to the plan, and the remainder was paid with the proceeds of a bank loan. The series of preplanned transactions also involved the issuance of 63,000 class B shares to Johnson; the transfers and use of deficiency judgments under the foreclosure proceedings and of redemption rights in such manner as to render the steps taken conclusive and definitive. For these transfers no specific consideration was recited.
Such a background well supports the testimony of petitioner's witnesses that the express price or consideration for any specific asset or group of assets was an arbitrary figure lacking in probative value as an index of cost. Shareholders, bondholders, creditors, officers, and others having an interest in the most advantageous economic salvage of Pacific's assets and business agreed among themselves on what reorganization plan would be most beneficial; on the division of rights and interests that seemed most just; and on the contracts, sales, and other implementing transactions which would best facilitate the carrying out of such a plan in a definitive manner. All of the steps were integrated as parts of a whole, and the ensuing bids at the receiver's auctions and recited considerations*292 in the sale contracts merely gave effect to the general agreement.
Of course outside parties could have bid at the auctions and outside offers or the possibility of such offers could have affected the recited contract considerations. But, in here rejecting these figures as conclusive of cost, we are influenced not only by the prior agreement fixing them, but also by the fact that in the general scheme there were transfers and relinquishments of rights for which no specific consideration was provided.
Those concerned rationally believed that retention of the whole group of assets and the managing personnel in a continuing unified business would give to the properties a greater value than they would have on dispersion. Hence the free use made of deficiency judgments and redemption rights and the transfer of the 63,000 class B common shares to manager Johnson without consideration. The true costs of the properties comprise these factors and others which are not reflected in the bid or contract prices. No isolated transaction here *365 represents the meeting of minds about a specific asset or the price agreed on for its purchase. Each specific transaction is rather one of a *293 series of payments to be made and one of a series of assets to be transferred in a general division and settlement. Under such circumstances the isolated price of an asset, while literally connected with that asset, becomes merely an item of computation in the total price paid for all assets.
There is no itemized break-down of the Commissioner's determination of bases, and, as noted in the opinion rendered in the prior proceeding, , his method of computation does not clearly appear. But petitioner attacks the use of bids and contract prices as cost, and respondent defends the use of them, even stressing that shares were issued only for the properties mortgaged to secure Pacific's bonds, and arguing that for this reason share value has no possible effect on the bases of other assets. This contention becomes irrevelant if the total consideration is to be deemed paid for the aggregate assets, and is to be allocated as cost among such assets without a nice regard for the parties' recitations and formalities. We are of opinion that the character of the transactions carried out pursuant to the reorganization plan requires such an allocation, *294 and we therefore find and hold that petitioner's cost and basis is the stipulated value of the assets, of $ 4,346,075.97, allocable among the several groups in the amounts also stipulated. This figure, it will be noted, represents the value of the shares plus the cash paid and obligations assumed.
Other issues raised in the petition were abandoned.
Decision will be entered under Rule 50.
Disney, J., dissenting: In this dissent I will confine myself to the matter of ascertainment of cost of those properties which were purchased from the receiver and those which were purchased from creditors who had acquired them at foreclosure sale. I am unable to agree that the cost of such properties was anything other than the amount paid therefor. Under the statute the basis of property is, in general, its cost. Though there was a reorganization and though in connection therewith the petitioner issued stock and assumed obligations, it seems to me clear that there were certain properties which it was unable to acquire by that procedure, that it was necessary to purchase them, and I can see no reason to ascribe to such properties any effect from the fact of issuance of stock and*295 assumption of obligations. Plainly the procedure of issuing stock and assuming obligations was not sufficient to acquire the other properties. They had to be purchased. They were in reality outside the pale of the reorganization *366 through the stock obligations assumption operation. Quantitatively such purchased properties were large. I note that the total value of the acquired assets is stipulated to be $ 4,346,075.97. The unencumbered property purchased from the receiver was $ 700,000, while U. S. Spruce was paid about $ 436,000 for the property covered by the canceled contract. I would not permit the mere fact of a general reorganization procedure, under which these properties could not be acquired except by purchase, in part at auction where others might have bid, to overthrow the usual rule that basis is cost. I, therefore, respectfully dissent.