*191 Decision will be entered under Rule 50.
Petitioner was organized in 1930 and acquired all the assets and business of F. E. Mojonnier and his wife, the transferors. Several years prior to the petitioner's organization, the Mojonniers induced their son and son-in-law to enter their business and promised that stock would be issued to them when petitioner was organized. Upon petitioner's organization in 1930, F. E. Mojonnier offered to convey to it the assets of the business in exchange for a specified number of shares to be issued to him and others named in the offer. The transferors, after the transfer of the assets to petitioner, owned less than 80 per cent of the petitioner's stock. The transferors reported no taxable gain to themselves on the exchange. Held:
(1) Since the transferors owned less than 80 per cent of the petitioner's stock after the transfer of the assets, the exchange was a taxable transaction and petitioner, in determining "property * * * paid in for stock" in the computation of its equity invested capital, is entitled to include the property paid in by the transferors at its fair market value on the date of the transfer, rather than at the basis of the*192 assets in the hands of the transferors.
(2) The evidence failing to show any misrepresentation of fact, the petitioner is not estopped from claiming a higher basis for the assets than that in the hands of the transferors.
(3) Upon the evidence, the fair market value of the assets determined as of the date of the transfer.
*838 Respondent determined that there was an overassessment in petitioner's income tax for the years 1942 and 1943 in the respective amounts of $ 7,351.31 and $ 2,424.25 and determined deficiencies in excess profits tax for*193 those years in the respective amounts of $ 15,577.59 and $ 8,551.27. These deficiencies in petitioner's excess profits tax are due to an adjustment in its average equity invested capital and the disallowance of a credit for borrowed capital. The respondent computed petitioner's excess profits tax credit for 1942 and 1943 on an average equity invested capital of $ 114,569.47. In a statement attached to the deficiency notice the respondent explained the equity invested capital adjustment as follows:
It is held that, for the purpose of determining the amount of your equity invested capital to be used in computing the excess profits credit based on invested capital, the basis of the assets transferred to you at the date of organization is cost to the transferors. Moreover, you have failed to establish the fact that any of such assets were not recorded on the books at that time and therefore only such assets as were actually recorded thereon, exclusive of appreciation in the value of such assets, have been used in determining the amount of your equity invested capital.
Petitioner, by appropriate assignments of error, contests both adjustments which respondent has made. However, the*194 parties have stipulated that "drafts drawn on customers" constituted "borrowed capital" under section 719 (a) (1) of the Internal Revenue Code. Effect will be given to this stipulation in the recomputation under Rule 50. This stipulation leaves for our consideration the question of the amount to be included in petitioner's equity invested capital for the years 1942 and 1943 for "property * * * paid in for stock" in computing its excess profits tax credit by the invested capital method.
Respondent affirmatively pleads that the petitioner is estopped from claiming an amount in excess of the adjusted cost basis that the property had in the hands of the petitioner's transferors.
*839 FINDINGS OF FACT.
The facts which were stipulated are so found.
Petitioner is a corporation, organized under the laws of the State of Washington on or about February 25, 1930, with its principal office in Walla Walla, Washington, and it filed its income and excess profits returns for the calendar years 1942 and 1943 with the collector of internal revenue at Tacoma, Washington.
The petitioner is engaged in the greenhouse and produce business. This business was originally founded by F. E. Mojonnier *195 and his wife, Mathilde Mojonnier, sometimes hereinafter referred to as the Mojonniers, in Walla Walla, Washington, in 1909. In 1912 a corporation was formed by F. E. Mojonnier and his wife and four other stockholders under the name of the Walla Walla Hothouse Vegetable Co. By 1915 the Mojonniers owned all of the stock of the corporation. By deed dated August 14, 1918, the Walla Walla Hothouse Vegetable Co. conveyed to F. E. Mojonnier all real and personal property used for and in the operation of the business of the corporation, which property thereupon became the community property of F. E. Mojonnier and his wife, and the corporation was thereupon dissolved. From August 14, 1918, until February 26, 1930, the Mojonniers continued to do business under the trade name of Walla Walla Hothouse Vegetable Co. During the period the business was incorporated and thereafter until 1928 Mathilde Mojonnier did office work and kept the books, although entries pertaining to items other than current transactions were made by F. E. Mojonnier. These records were turned over to Lewis D. Felch in 1928. The books were crude and were kept as a "single entry" system.
The earliest record available *196 of the assets of the proprietorship is contained in a statement dated April 12, 1920, purported to be made to the Baker-Boyer Bank of Walla Walla. This statement is said to represent estimated market value and not to be based upon any book figures. It includes the residence of F. E. Mojonnier and his wife. The stated net worth of the business on that date was $ 127,716.20, as shown by a detailed tabulation of assets and liabilities.
By an instrument dated January 1, 1923, F. E. Mojonnier entered into a contract with his foreman, Fred A. Hills, providing for the incorporation of the business within a period of seven years with a capital of $ 125,000. It was agreed that Hills would be entitled to acquire $ 12,500 of the stock, which would represent one-tenth thereof. Hills was not required to pay cash therefor, but was to acquire the stock over a period of ten years by earning an equity thereon each year during the ten-year period which ended on November 24, 1933, when he would be entitled to delivery of the stock.
*840 Harold D. Mojonnier, the son of the Mojonniers, attended the University of Washington at Seattle, Washington, during the fall and winter quarters of 1923-1924*197 and 1924-1925, but did not attend the university during the spring or summer quarters of those years. Instead, he worked for his parents during those periods in their business at Walla Walla. In 1926, when Harold was twenty-one years of age, his parents requested him to leave the university to assist with the operation of the business, as the business had expanded; and they said that, if he did so, when the business was incorporated he would be issued some stock in the corporation. Such arrangement was oral, and no specific number of shares was stated that would be issued to him. Harold accepted his parent's proposal and did not return to the university after the spring of 1926 but devoted his entire time to his parents' business at a salary of from $ 150 to $ 175 per month until the formation of the petitioner corporation in 1930.
Lewis D. Felch graduated from the University of Washington in 1924 as an electrical engineer and was employed in the contracting business in Seattle until 1927. In 1926 he married Claire Mojonnier, daughter of the Mojonniers. Claire Mojonnier had been employed in the family business during vacations while she was in college. In the fall of 1927, *198 the business having expanded considerably, the Mojonniers requested Lewis D. Felch to come to work for them. They told him that the business was to be incorporated in a few years and that if he were then working for them stock in the corporation would be issued to him. Such arrangement with Lewis D. Felch was oral and no specific number of shares was stated that would be issued to him other than that it would be on the same basis as to Harold Mojonnier. Lewis D. Felch and his wife moved to Walla Walla in January 1928, and he started working in the business at a salary of from $ 150 to $ 175 a month, which was less than he had been receiving for his engineering work. Claire Felch worked in the office of the business, doing stenographic work, for about a year after she and her husband moved to Walla Walla in January 1928. Shortly after Felch entered the business he was given supervision of the records, and an accountant was employed to set up a double entry bookkeeping system. Felch went through the old books which had been kept by Mathilde Mojonnier and transferred everything to the new books.
When petitioner was organized February 26, 1930, the net value of the assets transferred*199 to petitioner was set up on its books at $ 194,546.53.
The incorporators of petitioner were F. E. Mojonnier, Mathilde Mojonnier, Harold D. Mojonnier, and Lewis D. Felch, and its authorized capital was 3,000 shares of no par value common stock. The articles of incorporation provided in part that the objectives for which the corporation was formed were:
*841 1. To take over and succeed to all of the growing, producing, distributing, shipping, warehouse and commercial business heretofore conducted by the undersigned F. E. Mojonnier under the name of Walla Walla Hothouse Vegetable Company and to continue and conduct all of said business.
The articles further provided:
III. The stock of this corporation shall consist of Three Thousand (3,000) shares of common stock without nominal or par value and may be issued by the corporation from time to time for such consideration in labor, services, money or property, as may be fixed by the Board of Trustees. The amount of capital (otherwise known as "initial non-par capital") with which this corporation shall begin to carry on business is the sum of One Hundred and Ninety-five Thousand ($ 195,000.00) Dollars.Attached to the articles of*200 incorporation is the following certification by F. E. Mojonnier:
State of Washington, County of Walla Walla,
ss.
F. E. Mojonnier, being first duly sworn upon oath says: I am one of the above named incorporators of Mojonnier & Sons, Inc., and to the best of my knowledge and belief the value of the assets received and to be received by the corporation in return for the issuance of its non-par value stock does not exceed the sum of $ 195,000.00.
F. E. Mojonnier.The organization meeting of the trustees and incorporators of petitioner was held at Walla Walla on February 26, 1930, at which meeting the bylaws were first adopted, section 1 of article II containing the provision that "the amount of capital (otherwise known as 'initial non-par capital') with which this corporation shall begin to carry on business is the sum * * * [of] $ 195,000.00 * * *." Officers were then elected as follows: F. E. Mojonnier, president; Mathilde Mojonnier, vice president; Lewis D. Felch, secretary; and Harold D. Mojonnier, treasurer. At this meeting F. E. Mojonnier submitted the following written proposal:
Walla Walla, Washington.
February 26, 1930.
Mojonnier & Sons, Inc.,
Walla Walla, Washington.
*201 Gentlemen:
In full payment for all of the capital stock of your corporation, the same to be issued as hereinafter set forth, I hereby offer, as follows:
(1) My wife and myself will convey to the corporation by warranty deed, free of encumbrance except general taxes thereon for the year 1929, the following bounded and described lands and premises in Walla Walla County, Washington, together with all improvements thereon, to-wit:
* * * *
(2) I will assign to the corporation the following leases which I now hold, to-wit:
* * * *
(3) I will turn over and transfer to your corporation all of the stock in trade, business, good will, trade and trade name of the Walla Walla Hothouse Vegetable *842 Company (that being the name under which I have been doing business) together with all contracts, book accounts, office, warehouse and hothouse supplies, fixtures, equipment, tools and appliances and all unexpired insurance of business property.
I estimate the foregoing property to have a present value of $ 195,000.00, and in the event of the acceptance of this proposition, all of the capital stock of your corporation is to be issued as fully paid to the following: 1,000 shares to yourself to *202 be held as treasury stock and sold for your benefit at such time or times, for such price or prices, and on such terms as your Board of Directors may from time to time order and direct; 250 shares to Mathilde Mojonnier; 250 shares to Harold D. Mojonnier as his separate property; 150 shares to Claire D. Felch as her separate property; 100 shares to Lewis D. Felch; 10 shares to F. A. Hills, and the remaining 1240 shares to be issued to me.
Yours very truly,
F. E. Mojonnier.The following statement appears in the minutes of this meeting:
The several directors having examined the leases submitted and being familiar with the property, real and personal, referred to in the foregoing offer, and it being considered by all present that said property is reasonably worth the sum of $ 195,000.00, it was ordered by unanimous vote of all present that said offer be accepted and that all of the stock of the corporation be issued as fully paid and as directed in said offer as soon as said F. E. Mojonnier has complied with the terms thereof by making conveyance and transfer of the property, real and personal, therein described, including the three leases.
Thereupon the said conveyance of real estate, *203 assignment of leases and transfer of personal property were completed by said F. E. Mojonnier and wife and duly accepted by the Directors of the corporation, and the President and Secretary were by the unanimous vote of all present instructed to immediately issue and deliver the capital stock of the corporation as provided in the aforesaid offer of said F. E. Mojonnier.
The salaries of the officers were then fixed at $ 12,000 per year for the president and $ 4,250 per year each for the secretary and the treasurer. At this meeting, in accordance with the above offer, F. E. Mojonnier and his wife deeded and assigned to petitioner all of the assets of the business except their residence. All of the stock was issued in accordance with the written offer made by F. E. Mojonnier to the corporation. Stock certificates were issued to F. E. Mojonnier for a total of 1,240 shares and a certificate for 250 shares was issued to Mathilde Mojonnier. The 1,490 shares were received by them as a marital community. Also, 250 shares were issued to Harold D. Mojonnier; 150 shares were issued to Claire D. Felch; 100 shares were issued to Lewis D. Felch; and 10 shares were issued to F. A. Hills. The*204 minutes of the first meeting of the stockholders provided as follows:
Walla Walla, Washington.
February 26, 1930.
All of the stockholders of the above named corporation met at Walla Walla, Washington, on the above date, the following stockholders holding the number of shares set opposite their respective names being present in person and not by proxy, to-wit: *843
| F. E. Mojonnier | 1240 shares |
| Mathilde Mojonnier | 250 shares |
| Harold D. Mojonnier | 250 shares |
| Claire D. Felch | 150 shares |
| Lewis D. Felch | 100 shares |
| F. A. Hills | 10 shares |
F. E. Mojonnier, the duly elected President, presiding. It being found that those present hold all of the outstanding stock of the corporation, it was moved that notice of the meeting be waived and same was carried by unanimous vote. Thereupon the Secretary read the minutes of the first meeting of the Trustees or Directors of the corporation including the By-Laws adopted and the written offer of F. E. Mojonnier accepted, pursuant to which all of the capital stock of the company has been issued.
On motion the stockholders unanimously voted the adoption of said By-Laws and further voted unanimously to fully ratify and confirm the action of *205 the Trustees or Directors in accepting the offer of F. E. Mojonnier and the issue and delivery of all of the capital stock of the corporation pursuant thereto. The stockholders by unanimous vote elected the following directors of the corporation to hold office for the term of one year and until the election of their successors, to-wit: F. E. Mojonnier, Mathilde Mojonnier, Harold D. Mojonnier, and L. D. Felch.
There being no further business, the meeting adjourned.
F. E. MojonnierPresident.
On the date of incorporation, February 26, 1930, the 1923 contract between F. A. Hills and F. E. Mojonnier was modified to provide that 10 shares of the capital stock of the corporation were to be issued to Hills at that time and that an additional 115 shares of capital stock would thereafter be issued on November 24, 1933, pursuant to the original contract. The contract also provided that Hills was to pay to Mojonnier certain additional cash totaling $ 560 between February 26, 1930, and November 24, 1933, in connection with the revision of the original contract.
On October 1, 1931, Mojonnier gave Hills $ 2,500 and adjusted the amount of stock which would become payable to Hills to the sum*206 of $ 10,000. Accordingly, when the remainder of the stock was issued to Hills in 1933 only a net of 100 shares was transferred in full satisfaction of the 1923 agreement.
The assets which were transferred to petitioner by the Mojonniers at the time of its incorporation on February 26, 1930, had a total fair market value on that date of $ 195,000. These assets had an adjusted cost basis to the Mojonniers on that date of $ 177,404.39.
Issue of Estoppel.
The personal income tax returns filed by F. E. Mojonnier and his wife for 1918 reported no gain or loss thereon for the assets acquired by them in that year upon the dissolution of the former corporation, *844 Walla Walla Hothouse Vegetable Co. The personal income tax returns filed by F. E. Mojonnier and his wife for 1930 reported no gain or loss as having resulted from the exchange of their business assets to petitioner.
The revenue agent who examined the returns of petitioner for the year 1930 proposed certain adjustments in connection therewith in his report. This report, under the item "Financial History," stated:
Mojonnier & Sons, Inc, is the incorporation of the personal business of F. E. Mojonnier, incorporated February*207 25, 1930, by the issuing of 3000 shares of non par stock, 1000 of which was returned to the treasury.
The value of the 2000 shares of non par stock as shown by the books was $ 119,785.26.
The total assets paid in for the capital stock was [sic] the community property of F. E. Mojonnier and Mathilde Mojonnier, his wife, and was [sic] entered on the books of the corporation in the same amounts as carried on the books of the individual.
In the report, among other items, it was proposed that the amount of $ 13,777.03 which was paid by the petitioner in 1930 for certain improvements to the residence of F. E. Mojonnier be deemed a dividend. The report under "EXPLANATION OF ITEMS CHANGED," further provided in part as follows:
At the time Mr. F. E. Mojonnier submitted his offer to incorporate, he had under construction a personal residence, which it was estimated would cost $ 15,000.00 to complete.
As a part of the incorporation it was mutually agreed that this amount should be assumed by the corporation as a part of its indebtedness. No liability was shown on the books of the corporation, but the corporation as payments were made, charged Mr. Mojonnier's personal account and in*208 the year 1931, his account was given credit for $ 15,000.00 and the account cancelled against surplus and capital of the corporation.
The account to the extent of the charges against it in the year 1930, and which were eventually used to decrease surplus and capital, is deemed to be a dividend as earnings of the corporation in 1930 was sufficient for its payment, and were so applied. Total dividend constructively received as at Dec. 31, 1930, $ 13,777.03.
In connection with these adjustments the petitioner wrote a letter to "Treasury Department, Internal Revenue Service, Seattle, Washington," dated July 12, 1932, in which it objected that the amount of $ 13,777.03 which was paid by the petitioner in 1930 for certain improvements in the residence of Frederick E. Mojonnier should be deemed a dividend to him. This letter stated in part as follows:
Answering your letter of July 7th, regarding the amended report or our Income Tax Statement for the year of 1930, we have carefully gone over the report attached to your letter and find that it is the same in all essential details as the perliminary [sic] statement which was worked out by Deputy Frank Johnson from our books while in*209 our office recently.
On page 1, of his report, in what he calls the preliminary [sic] statement, he states that the various items were discussed with the writer who did not agree *845 with the changes. The writer is in accordance with Mr. Johnson's opinion on all of the changes embodied in this report, but does take exception to the explanation and the handling of the item in Exhibit B-1, pages 7 and 8 under the item (g), is the statement to which the writer takes exception. The particular item which we do not agree on is that the amount involved, which for the 1930 portion was $ 13,777.03, "is deemed to be a dividend, as earnings of the corporation in 1930 was sufficient for its payment, " It is the consideration of this item as a dividend to Mr. Mojonnier which we feel is an erroneous interpretation of the facts by the deputy in making this report. All other items of the report are in accordance with the writer's ideas of corrections which should be properly made to the income return of 1930.
As stated in the report, at the time of the incorporation of the company, Mr. Mojonnier, who was sole owner, together with his wife, of the properties, offered to turn them*210 over to the corporation in return for the stock of the corporation. It was merely a change of the form of ownership only, and the stock was all subscribed by Mr. Mojonnier, he turning in all assets, goodwill, etc. of the old firm which was operating under the name of the Walla Walla Hothouse Vegetable Company, and in return receiving all the stock in the new corporation. In offering to turn over all assets to the corporation, Mr. Mojonnier reserved for his own personal property, and not to be considered part of the assets of the corporation, that portion of land upon which his residence was situated, and of course, the residence itself with the further stipulation that the reservation was to be understood as embodying the completed residence which, at that time, was under the course of remodeling and reconstruction. For certain reasons, it was desirable to incorporate at that particular time, although certain contracts that Mr. Mojonnier had with employees of the company, did not call for incorporation before 1933, at which time certain stocks were to be issued to them. In view of the fact that the incorporation was being done three years prior to the time which was originally*211 planned, the residence was not completed at the time of incorporation, and it was part of the plans that the residence should be completed, remodeled, and should be reserved from the assets. The fact that the company after incorporation paid for these alterations a sum amounting to $ 15,000.00, does not constitute income to Mr. Mojonnier since it is merely reservation of assets. * * *
In schedule "C" of petitioner's excess profits tax returns (Form 1121) for each of the calendar years 1942 and 1943, the excess profits credit was based on invested capital and the amount of $ 195,000 in each of the returns was placed on line "1," "Money paid in for Stock, or as Paid-in Surplus, or as a Contribution to Capital."
The net income of F. E. Mojonnier and his wife from their business for the years 1927, 1928, and 1929 as disclosed by their returns for these years was in the respective amounts of $ 6,380.62, $ 20,395.14, and $ 37,943.51. The commission business carried on by them for 1928 and 1929 earned them commissions in the respective amounts of $ 13,263.68 and $ 32,500.27.
OPINION.
The principal question for determination in this proceeding is whether, for the purpose of determining*212 the petitioner's equity invested capital under section 718 (a) (2) of the Internal *846 Revenue Code1 for the years 1942 and 1943, the petitioner is entitled to include property paid in for stock at cost to it when acquired on February 26, 1930, at the time of its organization, or required to use the adjusted cost of such property to F. E. Mojonnier and his wife, the transferors, on that date. Petitioner contends that in the computation of its equity invested capital it is entitled to include property paid in for stock at the cost of the property, viz., the fair market value of the assets when acquired by it on February 26, 1930. Petitioner contends that this fair market value on the basic date was not less than $ 240,000. Respondent, on the other hand, contends that for the purpose of computing its equity capital the petitioner is required to use the adjusted cost basis of the assets in the hands of the transferors, which he determined in the deficiency notice was $ 114,569.47 on the basic date, and that petitioner is now estopped to claim a stepped-up basis.
*213 Section 718 (a) of the code provides that, in determining equity invested capital, "property * * * paid in for stock" shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. Section 113 (a) of the Revenue Act of 1928 provides that the basis of property for determining gain or loss shall be the cost of such property, unless it comes under one of the exceptions specified in section 113 (a). Section 113 (a) (8) provides that if the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5), the basis shall be the same as it would be in the hands of the transferors. If the exchange herein was one in which gain or loss is recognized, then in computing its equity invested capital petitioner is entitled to include the property paid in for stock at the cost to it on the date of its acquisition. If, on the other hand, the exchange was one in which gain or loss is not recognized, then in computing its equity invested capital petitioner is required to use the adjusted cost basis of the property paid in for stock in the hands *214 of the transferors. Whether the transaction was a taxable or nontaxable exchange depends upon whether or not the transferors of these assets were in "control" of the petitioner immediately after the transfer on February 26, 1930, within the meaning of section *847 112 (b) (5) and (j) of the Revenue Act of 1928. 2 The term "control" as defined in section 112 (j) of that act means "the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation."
*215 The facts show that the transferors, the Mojonniers, owned and operated a greenhouse and produce business in Walla Walla for many years prior to 1930. In 1923 there was a contract with their foreman, Fred A. Hills, providing for the incorporation of transferors' business in seven years. Hills was to receive a one-tenth interest in the stock of the corporation under that contract in consideration for his services through the years to 1933. Harold Mojonnier, the transferors' son, was attending the University of Washington in 1926. His parents requested him to leave the university to assist in the operation of the business and said that, if he did so, when the business was incorporated he would be issued stock therein. Harold accepted his parents' proposal and did not return to the university after the spring of 1926, but devoted his entire time to his parents' business at a salary of from $ 150 to $ 175 per month until the formation of petitioner in 1930. Lewis D. Felch, the transferors' son-in-law, in 1927 was engaged in business as an engineer in Seattle, Washington, and in the fall of that year, the transferors' business having expanded considerably, they requested him to come*216 to work for them, stating that, if he did, stock would be issued to him in the corporation which was to be formed. Felch thereupon in 1928 started working for the transferors at a salary of from $ 150 to $ 175 a month, which was less than he had been receiving as an engineer.
On February 25, 1930, the petitioner was organized with an authorized capital of 3,000 shares of no par value common stock. F. E. Mojonnier made a written proposal at the organization meeting on February 26, 1930, whereby he offered to convey to the corporation the real property owned by himself and his wife, together with all the other assets of the business, for which 1,240 shares were to be *848 issued to himself, 250 shares to his wife, 250 shares to Harold D. Mojonnier, 150 shares to Claire D. Felch, 100 shares to Lewis D. Felch, and 10 shares to F. A. Hills, and the remaining 1,000 shares were to be held as treasury stock. The certificates for the various shares of stock were issued directly to these persons in accordance with the offer. Thus, F. E. Mojonnier and his wife, after the transfer, together owned 1,490 shares out of the total of 2,000 shares, which was 74.5 per cent of the petitioner's*217 outstanding capital stock. This they owned as community property under the laws of the State of Washington. The evidence shows that the entire transaction herein was in good faith and the stock was issued to F. A. Hills, Harold Mojonnier, and Lewis D. Felch in accordance with the agreement that the Mojonniers had made with them several years prior thereto. Although no specific number of shares was promised to Harold Mojonnier and Felch at the time they were induced to enter the transferors' business, the stock which was issued to them at the time of petitioner's incorporation was issued pursuant to the agreement, and it was so understood by all the parties. We do not think that the fact that 150 shares were issued to Claire D. Felch, the daughter and Felch's wife, is material. The stock was issued to Felch and his wife in consideration of Felch giving up his engineering profession and entering the transferors' business. The testimony of the several parties to the transactions well establishes that fact.
Respondent argues that in substance the transaction was a transfer of the entire business by the transferors in exchange for all of the stock and thereafter a series of gifts*218 by them to members of their family. We do not agree with respondent's contention that there was a gift of the stock herein. A gift is a voluntary transfer of property from one to another without consideration. Noel v. Parrott, 15 Fed. (2d) 669. Here there was consideration. It was in the nature of a reward for past services and an acknowledgement of the transferors' promise to their son and son-in-law to give them stock in the corporation in consideration of their giving up a college course and the engineering profession, respectively, in order to enter the transferors' business. See Williston, Contracts (2d Ed.), sec. 100; Finlay v. Swirsky, 103 Conn. 624">103 Conn. 624; 131 Atl. 420.
The facts in this case have features somewhat similar, we think, to those in Florida Machine & Foundry Co. v. Fahs, 73 Fed. Supp. 379; affd., 168 Fed. (2d) 957. In that case Franklin G. Russell, Sr., for some years prior to 1912 was the sole proprietor of a business which was engaged in making machine castings and doing general foundry and machine work. *219 After his son graduated from college in 1916 he entered his father's business, where he served in various capacities. Beginning about 1920, the father and son discussed plans for the son to acquire a half interest in the business and ultimately to succeed *849 his father as general manager. About 1921 the father and son reached an agreement that the son was to have a half interest in the business in consideration for the son staying in the business and operating it. In order to carry out this agreement a corporation was organized on July 24, 1924, wherein Russell, Sr., conveyed to the corporation all of the assets of the business individually owned by him for stock, of which 1,181 shares were issued to him, 1,176 shares to the son, and 3 shares to other persons. The court found that Russell, Sr., owned less than 80 per cent of the capital stock of the taxpayer corporation immediately after the transfer of the stock to it on July 24, 1924, and therefore did not have "control" of the corporation "immediately after the transfer" as defined in section 112 (h) and (b) (5) of the code. The court stated in part as follows:
* * * There is no evidence of subterfuge or evasion -- *220 no evidence that Mr. Russell sought to conceal a personal control of the corporation by formally placing one-half of the capital stock in his son's name. To the contrary, it appears that the entire transaction was regular and in good faith, for the declared purpose of bringing his son into the business as a one-half owner, so that the son could and would carry on this long-standing family business after the retirement of his father, who was then getting along in years. * * *
We hold, therefore, that, since the transferors herein owned less than 80 per cent of the capital stock of petitioner immediately after the transfer of the real property and other assets on February 26, 1930, they were not in control of petitioner immediately after the exchange within the meaning of section 112 (b) (5) and (j) of the Revenue Act of 1928 and, therefore, the transaction was a taxable exchange. Florida Machine & Foundry Co. v. Fahs, supra;Heberlein Patent Corporation v. United States, 105 Fed. (2d) 965; Bassick v. Commissioner, 85 Fed. (2d) 8. Cf. Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513.*221
Respondent, in contending that the transaction constituted a nontaxable exchange within the meaning of section 112 (b) (5), cites and principally relies upon Wilgard Realty Co. v. Commissioner, 127 Fed. (2d) 514. We think this case is distinguishable on its facts. In that case the taxpayer was organized by one Chamberlin, who conveyed to the corporation certain property in return for 197 shares of its capital stock. On the same date Chamberlin, on receipt of the stock issued in his name, made a gift of 156 shares, transferring without consideration 39 shares each to his brother and his 3 children. It was pointed out that the stock was a gift to his relatives, which the transferor could make or withhold at his pleasure. He was not bound to give the stock away when he received it and he was free at any time to change his mind and use it for any lawful purpose, which would "include the use of it to control the petitioner [the taxpayer] for as long as he desired."
*850 In the instant proceeding, however, the stock, exclusive of the 1,490 shares issued to Mojonnier and his wife, was not issued to the transferors and then conveyed by them to members*222 of their family, but was issued directly to the members of the family in accordance with the plan and offer of F. E. Mojonnier. Thus, the transferors were never the owners or holders of a sufficient amount of stock to place them in "control" of the corporation within the meaning of section 112 (j). Cf. Heberlein Patent Corporation v. United States, supra.
Issue of Estoppel.
Respondent, however, maintains that the petitioner is estopped to now claim that the 1930 transaction constituted a taxable exchange. He bases his claim for estoppel on the fact that F. E. Mojonnier and his wife did not report a gain on the transfer of the assets to petitioner at the date of its formation on February 26, 1930, and escaped taxation on the gain derived from the exchange and, since the statute of limitation has run against the collection of taxes against the transferors for those years, the petitioner is estopped to claim a higher basis for the assets transferred to it than the adjusted cost basis of the assets in the hands of the transferors. We do not think the omission on the part of the transferors to report a taxable gain arising from the transfer of*223 their assets to the petitioner estops the petitioner from claiming that the exchange was a taxable transaction. There can be no estoppel against the petitioner for the acts of its transferors, who were not in control of the petitioner immediately after the transfer and who acted in good faith. Florida Machine & Foundry Co. v. Fahs, supra.In the latter case the court said:
We further find no merit in the argument that taxpayer should be required to use the basis of its transferor, Franklin G. Russell, Senior, because of the latter's failure to report the transfer in 1924. There can be no estoppel against taxpayer for the act of its transferor, who was not in control of taxpayer corporation immediately after the transfer, and who was shown to have acted in good faith.
After an examination of all the evidence on the issue of estoppel, we conclude that, if the transferors were required to report additional income in 1930 as a result of the exchange, the failure to report it was caused by a mistake of law and not because of any intent on the part of the petitioner or the transferors to mislead. See Hawke v. Commissioner, 109 Fed. (2d) 946.*224 The revenue agent who examined petitioner's books and records as early as 1932 seems to have been fully advised as to what took place upon the organization of petitioner on February 26, 1930. We are of the opinion and we hold that no estoppel has been shown.
*851 Fair Market Value of the Property.
Since we have held that the transfer to petitioner was not a tax-free transfer under section 112 (b) (5), petitioner, in its computation of equity invested capital, is entitled to include the "property * * * paid in for stock" at "its basis (unadjusted) for determining loss upon sale or exchange." In Ida L. McKinney, 32 B. T. A. 450, 456; affd., 87 Fed. (2d) 811, we said:
It is well settled that the cost to a corporation of the property acquired through the issuance of its capital stock is the fair market value of such capital stock on the date issued, and where all of the capital stock of a corporation is issued for property and there is no other method of measuring the fair market value of the stock so issued, such fair market value on that date may properly be determined to be the equivalent of the fair market value of*225 the property received. Reliance Investment Co., 22 B. T. A. 1287; Mead Realty Co., 21 B. T. A. 1062; L. H. Philo Corporation, 16 B. T. A. 130; John Glackner Realty Corporation, 11 B. T. A. 151; Realty Sales Co., 10 B. T. A. 1217.
Cf. Independent Oil Co., 6 T.C. 194">6 T. C. 194.
What was the fair market value of the assets acquired by petitioner on February 26, 1930? The fair market value of property is "the price which property will bring when offered by a willing seller to a willing buyer, neither being obligated to buy or sell." Elmhurst Cemetery Co. v. Commissioner, 300 U.S. 37">300 U.S. 37. Petitioner contends that the fair market value of the assets acquired by petitioner at the time of the transfer was not less than $ 240,000. Respondent, on the other hand, contends that the fair market value of the assets received by the petitioner was not in excess of $ 195,000. We have carefully examined all the evidence in the record on this issue, and we think it supports the contention *226 of respondent that the property did not have a fair market value in excess of $ 195,000. All the documentary evidence at the time of the transaction, of which there is considerable, shows that all the parties regarded the property which the Mojonniers were transferring to petitioner as having a fair market value of $ 195,000 at the time of the transfer. Notwithstanding the evidence upon which petitioner lays much stress in its brief, we are not convinced that these assets had a greater fair market value than $ 195,000, but we are convinced they did have that much value.
Therefore, upon the evidence, we have made an affirmative finding that these assets had a fair market value of $ 195,000 on February 26, 1930. That figure should be used in determining petitioner's equity invested capital for the taxable years in question.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 718. EQUITY INVESTED CAPITAL.
(a) Definition. -- The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b) --
(1) Money paid in. -- Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital;
(2) Property paid in. -- Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. * * *↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined upon section 111, shall be recognized, except as hereinafter provided in this section.
(b) Exchanges Solely in Kind.
* * * *
(5) Transfer to corporation controlled by transferor. -- No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
* * * *
(j) Definition of Control. -- As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.↩