*842 1. Where corporation M had acquired by purchase a mixed aggregate of assets among which was certain preferred stock in another corporation and such preferred stock was shortly thereafter redeemed at a premium, held, the taxpayer is taxable on the profit which resulted from such redemption. Held, further, the Commissioner's allocation of cost to the preferred stock in question is approved for lack of evidence to overcome its correctness.
2. Corporation M was organized December 2, 1924. It transacted business in the period December 2 to December 31, 1924, from which it derived a profit but did not file an income tax return within the time required by law. It filed a belated return April 3, 1935, which was ten years after the return was due and five years after the Commissioner's notice of deficiency had been mailed. Held, petitioner has not shown that its failure to file the return on time was due to reasonable cause and the Commissioner's imposition of a 25 percent delinquency penalty is approved.
3. Waiver of statutory period for assessment of income taxes, executed by officer and director of dissolved Maryland corporation, in the name of the corporation and*843 with the corporate seal attached, after expiration of statutory period, where statutory period expired subsequent to dissolution, held, valid and binding upon the corporation and the deficiency is not barred by the statute of limitations.
4. Where an individual was the owner of a valuable contract to acquire certain assets of an existing corporation and he and his associates organized a new corporation to acquire the assets and were immediately in control of the new corporation, and such individual thereupon transferred his contract to the new corporation without consideration, held, the new corporation is not entitled to add to the cost of the assets acquired by purchase from the old corporation the fair market value of the contract. The contract cost the individual nothing and the taxpayer corporation is entitled to no increased cost thereby. Held, further, taxpayer corporation is entitled to add to its cost basis of the assets acquired certain liabilities assumed and paid and not included in the original purchase figures.
5. Corporation M, which acquired certain shares of stock in another corporation in exchange for its own capital stock not in a statutory*844 reorganization, but in a nontaxable exchange under section 203(b)(4), Revenue Act of 1924, is entitled to use the same basis of cost upon the liquidation of such shares in determining gain or loss as the transferors would have been entitled to use. Sec. 204(a)(8), Revenue Act of 1924.
6. Corporation M, keeping its books on the accrual basis, is entitled to accrue in 1925 capital stock taxes due by it for the period July 1, 1925, to June 30, 1926, even though such taxes were not actually paid until 1928 by one of its transferees in liquidation.
7. Corporation M, receiving a liquidation distribution in exchange for stock which it owned in another corporation, is entitled to reduce the amount which it received by the amount of Federal income taxes which it subsequently paid for and on behalf of the liquidated corporation.
8. Corporation M owned certain stock in another corporation which it sold at a loss in the taxable year. Held, that the sale was bona fide and the Commissioner's disallowance of part of the loss on the ground that the sale represented in part a gift to the purchaser is not sustained. Held, further, the Commissioner's determination of the cost basis*845 of the stock is approved. Petitioner is not entitled to add to its basis of cost the cost of other stock in the same corporation which was not included in the sale.
9. Corporation M is not entitled to a loss on stock in another corporation which it purchased during the taxable year at a price much greater than its then fair market value. Such purchase was made because petitioner was under a contract which compelled it to purchase. It was nevertheless a purchase. The stock was not worthless during the taxable year and the petitioner can take no loss until the stock is disposed of in a transaction where gain or loss is recognized.
10, 11, 12, and 13. Where stockholders of corporation M acquired their stock in an exchange, nontaxable under section 203(b)(4) of the Revenue Act of 1924, their basis for gain or loss upon the liquidation of their stock in 1928 is the same as the cost of the stock which they exchanged for corporation M stock. Sec. 113(a)(6), Revenue Act of 1928.
14. Corporation M on December 1, 1927, sold its principal asset for $2,215,000 in cash. On December 10, 1927, it declared a dividend of $10 per share. On January 6, 1928, it purchased 8,000 shares*846 of its own capital stock at $70 a share. On January 7, 1928, a dividend of $20 per share was declared. In the same month corporation M purchased 20,000 more shares of its capital stock at $50 per share and on January 25, 1928, formally resolved to liquidate and authorized the transfer of its remaining assets to its two corporate stockholders, corporations A and B. Corporation M was dissolved March 15, 1928. Held, the dividend of $10 was an ordinary dividend and not paid in pursuance of a plan for the complete liquidation of corporation M. Held, further, the dividend of $20 per share was declared in pursuance of a plan for complete liquidation of corporation M and served to decrease the cost basis of stock upon which it was paid.
15 and 16. Certain shares of stock owned by corporation M in another corporation at the time of its liquidation were distributed to its two remaining stockholders, corporations A and B. Held, that the fair market value of the shares received by corporation A at the time of distribution to it in liquidation is to be taken into consideration in computing its gain or loss resulting from the liquidation.
17. Petitioner T. H. Symington*847 & Son, Inc., has conceded its liability as transferee for any deficiencies determined in these proceedings against the Magothy Corporation. Held, that in determining gain or loss to T. H. Symington & Son, Inc., resulting from the liquidation of the Magothy Corporation, effect should be given to the amount of deficiencies, penalties, and interest determined against the Magothy Corporation.
*713 The respondent determined deficiencies in petitioners' income taxes and asserted a 25 percent delinquency penalty, as follows:
| Petitioner | Docket | Year | Deficiency | Penalty |
| T. H. Symington & Son, Inc | 62229 | 1928 | $37,245.00 | |
| Elsie J. Symington | 62228 | 1928 | 1,005.60 | |
| Emily H. Symington | 62161 | 1928 | 18,792.39 | |
| Elizabeth L. Symington | 62234 | 1928 | 11,250.00 | |
| Magothy Corporation | 48890 | (1) | 4,884.27 | $1,221.22 |
| Do | 48890 | 1925 | 121,732.64 | |
| Do | 48890 | 1926 | 2,568.84 | |
| Do | 48890 | 1927 | 107,931.27 |
Also, the*848 respondent is asserting against each of the petitioners, T. H. Symington & Son, Inc., Docket No. 48786, and the Patapsco Corporation, Docket No. 48789, as transferees of the Magothy Corporation, liability for the full amount of the deficiencies in taxes and penalty determined as to that corporation for the years 1924 to 1927, inclusive. The proceedings were consolidated for hearing. Also, there were consolidated for hearing with these proceedings, Emily H. Symington, Docket No. 48788; Elsie J. Symington, Docket No. 48787; and Elizabeth L. Symington, Docket No. 48889, in which respondent determined transferee liabilities against each of those individuals.
Petitioners in their brief with reference thereto make the following statement: "If the Board should determine that the three individuals are liable as transferees then petitioners request that the Board withhold the determination of the transferee liability of the three individuals in question until after the Collector first attempts to collect the taxes from the two corporations, i.e., T. H. Symington and Sons, Inc., and The Patapsco Corporation. The procedure suggested will insure the collection of whatever taxes may be finally*849 determined to be done from Magothy Corporation, in the manner originally planned by the stockholders at the time of the dissolution of Magothy Corporation."
In view of the above request the Board will not decide at this time the transferee liability issue as to the three named individuals, *714 but will leave those three dockets open and pending for future decision on the facts adduced at the hearing of these consolidated cases. If the two corporate transferees, T. H. Symington & Son, Inc., and the Patapsco Corporation, who admit their liability as transferees, pay and discharge whatever liability is adjudged against them as transferees, after the Board's decision has become final, as provided by law, then the Board, upon being advised of such payment and satisfaction, will enter decision that the three named individuals are not liable as transferees. If payment is not made of whatever taxes, penalties, and interests are finally adjudged against the Magothy Corporation in the manner which petitioners allege they are willing and agreeable to follows, then Docket Nos. 48787, 48788, and 48889 will be taken up and decided in a subsequent opinion.
On the brief, the petitioners*850 make the following statement relative to the transferee liability of T. H. Symington & Son, Inc., and the Patapsco Corporation:
Petitioners admit that whatever liability may be finally determined against Magothy Corporation, if any, for the said taxable periods, will be properly assessable against the petitioners, T. H. Symington & Son, Inc., and The Patapsco Corporation. In other words, they are admittedly transferees of Magothy Corporation and they are involved in this case only to the extent of ascertaining the true tax liability of Magothy Corporation, if any, for the years 1924 to 1927, inclusive, and whether such deficiency is barred by the Statute of Limitations. These two petitioners, as the stockholders of Magothy Corporation, specifically assumed the liability of that corporation for any taxes that might have been due, at the time of dissolution.
Effect will be given to this admission in a redetermination under Rule 50.
The issues are as follows:
1. Whether the Magothy Corporation realized a taxable profit during the period December 2 to December 31, 1924, upon the sale of certain preferred shares in the Locke Insulator Corporation.
2. If the Board should*851 hold in the affirmative as to issue 1, then, whether the Commissioner erred in asserting against the said corporation a 25 percent penalty for delinquency in filing its 1924 income tax return.
3. Whether the assessment and collection of the deficiency asserted and assessed against the Magothy Corporation for 1925 was, at the time the assessment was made, barred by the statute of limitations.
4. The correct basis to the Magothy Corporation of shares in The Symington Corporation, for the purpose of computing the gain or loss upon the liquidation of The Symington Corporation in 1925.
5. Whether Magothy Corporation sustained a deductible loss in 1925, upon the disposition of 30,000 common shares in the T. H. Symington Company (Delaware).
6. Whether Magothy Corporation is entitled to deduct in 1925, an amount of $2,630, representing capital stock taxes for the period July 1, 1925, to June 30, 1926, paid in 1928 by one of its transferees in liquidation.
*715 7. Whether the amount of $25,000 which the Commissioner included in income of the Magothy Corporation for 1926, as a liquidating dividend from The Lexington Machine Corporation, should be reduced by $3,149.86, *852 representing the liability of the liquidating corporation for federal income taxes, which was assumed and paid by Magothy Corporation.
8. Whether the Commissioner has determined the correct amount of the loss sustained by the Magothy Corporation in 1927, upon the sale of certain common and preferred shares in the Gibson Island Company.
9. If the Board, in its decision as to issue 8, should hold that a payment of $47,999.47, made by Magothy Corporation to E. H. Bouton, is not properly to be included in the cost to that corporation of the shares in The Gibson Island Company, for the purpose of Computing the loss resulting from the sale of the said shares, then said payment is a deductible loss sustained in 1927.
10. The cost to Emily H. Symington of her shares in the Magothy Corporation, for the purpose of computing gain or loss upon the disposition of those shares in 1928.
11. The cost to Elizabeth L. Symington of her shares in the Magothy Corporation, for the purpose of computing gain or loss upon the disposition of those shares in 1928.
12. The cost to Elsie J. Symington of her shares in the Magothy Corporation, for the purpose of computing gain or loss upon the*853 disposition of those shares in 1928.
13. The cost to T. H. Symington & Son, Inc., of its shares in the Magothy Corporation, for the purpose of computing gain or loss upon the disposition of those shares in 1928.
14. Whether certain distributions made by the Magothy Corporation in 1927 and 1928, to its shareholders, were liquidating dividends which reduced the basis to them of their shares, for the purpose of computing gain or loss upon the disposition of said shares in 1928.
15. Whether certain common and preferred shares in The Gibson Island Company were a part of the assets paid over to T. H. Symington & Son, Inc., by the Magothy Corporation in 1928, in liquidation of the latter, and are to be taken into consideration in computing the gain or loss to T. H. Symington & Son, Inc., resulting from the said liquidation.
16. If the Board should hold in the affirmative as to issue 15, then what was the fair market value of the shares in The Gibson Island Company, as of the date received by T. H. Symington & Son, Inc.
17. Whether in computing gain or loss to T. H. Symington & Son, Inc., upon the liquidation of the Magothy Corporation, effect should be given to the assumption*854 by the former of the liabilities of the latter.
All other issues raised by the pleadings either have been withdrawn, settled by stipulation, or abandoned.
On suggestion of the death of petitioner Emily H. Symington and notice of the appointment of executors, W. Stuart Symington and Francis F. Symington, executors of the estate of Emily H. Symington, deceased, were substituted as petitioners in the place and stead of Emily H. Symington, Deceased, in Docket No. 62161.
The proceedings were submitted upon oral and documentary evidence and an agreed statement of facts, from which we make the following findings of fact.
*716 FINDINGS OF FACT.
(1) On or about October 26, 1919, the Symington Corporation, organized in that year, acquired all of the outstanding shares in the Symington Machine Corporation, organized in 1916, in exchange for all of its own shares of stock. On November 1, 1919, the Symington Corporation acquired all of the assets of the Symington Machine Corporation, in exchange for all of the latter's outstanding shares.
(2) On December 31, 1920, all of the shares in the Symington Corporation were owned by the T. H. Symington Co. (Maine), hereinafter*855 called the Maine company. These shares were on the books of the Maine company at a figure of $1,000.
(3) The T. H. Symington Co. (Delaware), hereinafter called the Delaware company, was a corporation duly organized under the laws of Delaware on August 13, 1920, as successor to the Maine company. It was engaged in the manufacture of railroad draft gear, known as "Farlow Draft Gear", and journal boxes. Its principal manufacturing plant was at Rochester, New York. All of its shares, consisting of 100,000 no par common and 15,000 preferred of the par value of $100 per share, were issued, as of October 1, 1920, in exchange for all of the common and preferred shares, respectively, of the Maine company, the common on the basis of ten shares for one, and the preferred on the basis of share for share. The preferred shares were callable at $115 per share and accrued dividends, at the option of the company. All of said common and preferred shares were outstanding on and immediately prior to October 22, 1924, and on that date the company had outstanding bonds of an aggregate face amount of $1,339,000, which were redeemable on any interest date, at the option of the company, at 105 percent*856 of face amount, plus interest. It was dissolved on March 9, 1925.
(4) On December 31, 1920, the Delaware company acquired all of the assets of the Maine company in exchange for all of the latter's outstanding shares. These assets included, among others, the 10,000 outstanding shares in the Symington Corporation. The said shares were entered on the books of the Delaware company at $1,000. The Maine company was dissolved on February 23, 1921.
(5) Charles J. Symington owned 726 common shares in the Maine company. He exchanged those shares, as of October 1, 1920, for 7,260 common shares in the Delaware company. On December 15, 1920, he gave the said 7,260 shares to petitioner Elizabeth L. Symington.
(6) W. S. Symington, Jr., owned 706 common shares in the Maine company. He exchanged those shares, as of October 1, 1920, for 7,060 common shares in the Delaware company. On December 15, 1920, he gave the said 7,060 shares to petitioner Emily H. Symington.
*717 (7) The fair market value, as of December 15, 1920, of common shares in the Delaware company was $80 per share.
(8) Donald Symington owned 850 common shares in the Maine company. He exchanged those shares, *857 as of October 1, 1920, for 8,500 common shares in the Delaware company. On July 25, 1923, he gave 4,000 of the 8,500 shares to petitioner Elsie J. Symington.
(9) On October 22, 1924, the Delaware company, by resolution of its directors of that date, called all of its outstanding preferred shares for redemption on December 31, 1924, at $115 per share and accrued dividends to the date of redemption. Notice thereof was given to the preferred shareholders on October 24, 1924.
Transfer of T. H. Symington Co. (Delaware) Assets to Magothy Corporation.
(10) Under date of November 25, 1924, Charles J. Symington and Donald Symington submitted the following offer to the Delaware company:
We beg to submit herewith the following offer:
1. The undersigned jointly and severally hereby offer to purchase all of the assets of any and every sort, including the business and goodwill as a going concern of The T. H. Symington Company (hereinafter called the Company) and to pay therefor the following consideration:
(a) to assume and discharge all debts and liabilities of every sort of the Company, including, but not in limitation of the foregoing, the payment of the redemption price*858 of all preferred stock of the Company (which has heretofore been called for redemption) and the redemption price of all bonds of the Company which shall forthwith be called for redemption;
(b) to pay to the Company the sum of $5,000,000 in cash, it being the intention of this offer that the sale of the assets of the Company for the consideration herein provided shall net the holders of common stock of the Company pro rata the aggregate sum of $5,000,000 and therefore, at the time of conveyance to us or our nominees of the assets to be purchased pursuant to this offer, we shall make arrangements to pay to the holders of common stock of the Company, pro rata in accordance with the number of shares held by them, respectively, upon presentation and surrender of their stock certificates properly endorsed, at the office of the Chase National Bank of The City of New York, No. 57 Broadway, New York City, on or after December 15, 1924, the aggregate sum of $5,000,000 in cash. We shall be credited upon our obligation to pay $5,000,000 to the Company to the extent of $50.00 for each share of common stock of the Company so presented and surrendered to said The Chase National Bank of The City*859 of New York, and in case on December 31, 1924, any balance of said funds shall remain on deposit with said The Chase National Bank of The City or New York, such balance shall be paid to the Company or upon its order.
2. Said assets shall be conveyed by the Company on December 15, 1924, by good and sufficient deeds and instruments, to such corporations as the undersigned may designate and to each of such corporations you shall convey the particular assets which the undersigned shall designate, provided we shall have performed our obligations hereunder or secured the performance of the same to your satisfaction.
*718 3. Appropriate resolutions, calling its bonds for redemption at the earliest possible redemption date, shall forthwith be passed by the Company and other proceedings in connection with such redemption instituted at once.
4. If this offer is accepted by the Company and approved by the stockholders, the undersigned propose to organize two corporations, one of which is to take over and operate the railway specialty business and to assume the current liabilities of the Company; the other will take over for liquidation all the remaining assets and assume the*860 remaining liabilities of the Company. Charles J. Symington will be President and in control of the management and operation of the corporation which will take over and operate the railway specialty business and there will be issued to him for his own account for services one-half of its common stock. The remainder of its capital securities are to be sold to a financial group in which Donald Symington has a financial interest. Donald Symington will be President and in control of the management of the liquidating corporation and all of its capital securities will be issued to him for his own account.
5. If this offer shall be accepted, it is understood that the obligations herein assumed by us may be transferred by us to the respective corporations to be organized by us as above mentioned, in such proportions as we may determine, and, provided the performance of such obligations shall be thereby secured to your satisfaction, our personal liability hereunder shall thereupon be discharged.
6. Our offer herein contained is subject in all respects to the approval of our counsel as to all steps and proceedings in connection with the consummation thereof and subject further to the*861 approval thereof by the stockholders of the Company at a meeting duly called and held not later than December 13, 1924, for the purpose of acting upon this offer.
The offer was accepted by the directors of the Delaware company on November 26, 1924, and approved by the stockholders on December 13, 1924.
(11) Under date of November 28, 1924, Charles J. Symington entered into an agreement with the investment banking firms of Hambleton & Co. and Hornblower & Weeks, hereinafter called the bankers, whereby he agreed to organize a new corporation under the laws of Maryland, to be known as "The Symington Company", hereinafter called the Maryland company, which would acquire all of the real property, plants, fixtures, appurtenances, rights, privileges, franchises, patents, good will, and business of the Delaware company, for $4,500,000 and the assumption of its current obligations, and also acquire sufficient of the Delaware company's current assets to make the net quick assets of the Maryland company, as of December 31, 1924, amount to $1,500,000. The Maryland company was to be without funded debt, and to have outstanding 200,000 shares of class A stock and 300,000 shares of common*862 stock, both classes without par value. As part of the agreement, Charles J. Symington agreed to sell to the bankers 200,000 shares of class A stock and 150,000 shares of common stock of the Maryland company, for $4,500,000. The remaining 150,000 shares of common *719 stock were to be issued to Charles J. Symington in consideration, among other things, of his agreement to serve the new company as president for a period of five years.
(12) On December 5, 1924, Charles J. and Donald Symington agreed, in writing, to a division of their rights under the contract to purchase the assets and business of the Delaware company. Under the agreement Charles J. Symington was given the right to purchase all of the real property, plants, fixtures, appurtenances, rights, privileges, franchises, patents, good will, and business of the Delaware company, and such amount of the current assets of that company, to be selected by him, as would exceed the current liabilities, as of December 31, 1924, by the sum of $1,500,000, in consideration of his paying $4,500,000 to the company and assuming all of the company's current liabilities. Also, Donald Symington was given the right to purchase all*863 of the remaining assets of the Delaware company in consideration of his assuming all of the liabilities of the company not expressly assumed by Charles J. Symington, including the obligations to retire its bonds and preferred shares and to pay $50 a share for its common stock.
(13) The Delaware company gave notice to its common shareholders, on December 13, 1924, that arrangements had been made whereby upon presentation and surrender of their share certificates, properly endorsed, at the Chase National Bank of New York City on or after December 15, 1924, they would be paid therefor the sum of $50 per share surrendered by them. On December 16, 1924, the directors authorized the transmittal to the Chase National Bank of sufficient funds to redeem all of the company's preferred shares at $115 per share, plus accrued dividends, and all of its outstanding first mortgage bonds at 105 percent of the principal amount thereof, plus accrued interest, and to make payment, at the rate of $50 per share, for all of its common shares. On December 17, 1924, the Delaware company advised the Chase National Bank that arrangements had been made for depositing with that bank the sum of $5,000,000, *864 and requested the bank to pay the holders of the company's common shares, out of that fund, $50 per share for each of said shares delivered to the bank.
(14) On December 15, 1924, Elsie J. Symington, Donald Symington, T. H. Symington, Emily H. Symington, John F. Symington, and Elizabeth L. Symington entered into an agreement among themselves to deliver 30,000 common shares in the Delaware company, then held and owned by them, to the Magothy Corporation, in exchange for 30,000 no par value shares in the latter corporation.
(15) Sometime between November 28 and December 17, 1924, Charles J. Symington caused "The Symington Company," hereinafter *720 called the Maryland company, to be organized under the laws of Maryland, with an authorized capital of 200,000 shares of class A stock and 300,000 shares of common stock, both classes without par value, and transferred to that company all of his rights under the joint contract to purchase the assets of the Delaware company, as limited by the division-of-rights agreement of December 5, 1924, with Donald Symington.
(16) Pursuant to the agreement entered into on November 28, 1924, between Charles J. Symington and the bankers, *865 the Maryland company issued all of its class A shares and 150,000 shares of its common stock to the bankers, for $4,500,000. For the shares purchased by them, the bankers made payment by check dated December 17, 1924, payable to the Maryland company, which check, by appropriate endorsements thereon, was made payable by the Maryland company to the Delaware company, as its part of the cash consideration for the purchase of the latter's assets, and by the Delaware company to the Chase National Bank. This $4,500,000 was part of the $5,000,000 fund which the Delaware company advised the Chase National Bank it had arranged to deposit with the latter for the purpose of making payment for the company's 100,000 outstanding common shares.
(17) On December 2, 1924, Donald Symington caused the Magothy Corporation, sometimes hereafter referred to as Magothy, to be organized under the laws of Maryland, with an authorized capital, as per amended certificate of incorporation of December 12, 1924, of 50,000 no par value shares. On December 12, 1924, he offered to transfer to the corporation all of his rights under the joint contract to purchase the assets of the Delaware company, as limited by*866 the division-of-rights agreement of December 5, 1924, with Charles J. Symington, in consideration of the corporation assuming all of his liabilities under the said joint contract and agreement. The offer was accepted by the directors of the corporation on December 12, 1924, and, on the same day, notice of such acceptance was given by the corporation to the Delaware company.
(18) On December 16, 1924, the directors of Magothy approved the bill of sale and agreement to be executed by the Delaware company, the purpose of which was to effectively carry out the transfer of the assets of the Delaware company selected to be transferred to Magothy, and authorized Donald Symington, the corporation's president, to borrow, in his own or the corporation's name, such sums of money as in his judgment might be necessary to take care of the obligations assumed by the corporation under the terms of the bill of sale and agreement. The directors directed that the funds so borrowed should be deposited with the Chase National *721 Bank and used for the redemption and retirement of the outstanding bonds, and preferred and common shares of the Delaware company. Pursuant to that authority, Donald*867 Symington, on December 17, 1924, borrowed $3,076,296.55 from the Chase National Bank, depositing as collateral therefor 10,000 shares of preferred stock of the Locke Insulator Corporation, which were owned by the Delaware company, and 66,240 common shares (which represented the controlling interest) in the Delaware company. Out of the funds so borrowed, Donald Symington, for and on behalf of Magothy, deposited $2,259,106.28 with the Chase National Bank for the account of the Delaware company, to be used in redeeming and retiring the latter's outstanding preferred shares and bonds. The $2,259,106.28 was subsequently repaid by Magothy to Donald Symington and the Chase National Bank.
(19) By letter dated December 17, 1924, to the Delaware company, Charles J. and Donald Symington designated the Maryland company as transferee of the fixed assets, including the railway specialty business, patents, good will, and current assets, and directed that the said assets be conveyed to the Maryland company upon payment to the Delaware company therefor of the sum of $4,500,000, which was to be applied to the purchase price under the joint purchase contract. The latter also designated Magothy*868 as the transferee of all of the other assets of the Delaware company, and directed that said assets be transferred to Magothy upon the payment therefor of the sum of $500,000, also to be applied to the purchase price under the joint purchase contract. The letter further directed that, upon the execution and delivery of the proper instruments, the Delaware company should execute and deliver releases to Charles J. and Donald Symington, relieving them from all liability under the joint contract of purchase. The $4,500,000 to be paid by the Maryland company was paid by that company out of the proceeds from the sale of its own shares, as stated in paragraph 14. The $500,000 to be paid by Magothy was paid by Donald Symington out of the funds which he borrowed from the Chase National Bank, and Magothy reimbursed him therefor, on or about January 8, 1925, out of the proceeds of $1,500,000 received from the redemption of the 30,000 common shares in the Delaware company, referred to hereinafter in paragraph 26.
(20) On December 17, 1924, the following events, among others, took place: Charles J. and Donald Symington agreed between themselves to pay to the Maryland company, upon demand, *869 an amount in cash equal to the difference between $1,500,000 plus any amounts as of said date set aside to be paid out as dividends on the class A shares in the Maryland company for the period ending *722 December 31, 1924, and the amount of net quick assets as of the latter date, as certified by Ernst & Ernst; the Delaware company executed a general release in favor of Charles J. and Donald Symington; the Magothy Corporation and Charles J. Symington agreed to indemnify the Maryland company against all liabilities; and Donald Symington and Magothy entered into an agreement with the Maryland company releasing and discharging the latter from any liability against it arising out of the transfer of the assets of the Delaware company to the Maryland company.
(21) On the same day, December 17, the Delaware company delivered to the Maryland company deed covering real estate, assignments of patents, and bill of sale and agreement covering the assets to be acquired by the Maryland company; and it delivered to Magothy bill of sale and agreement covering the assets to be acquired by the latter.
(22) The following is a statement of the assets and liabilities of the Delaware company, *870 as of December 17, 1924, as shown by that company's books, after the transfer, on that date, of a portion of its assets and liabilities to the Maryland company, except that the liability items "Premium and interest due on bonds, $113,233.71" and "Premiums and dividends on preferred, $109,942.64" did not appear upon the books:
| Assets | |
| Notes receivable - the Symington Corporation | $350,000.00 |
| Interest - the Symington Corporation | 3,750.00 |
| Excess current assets - the Symington Co. | 511,206.78 |
| Stock - the Symington Corporation | 1,000.00 |
| Stock - Locke Insulator Corporation, preferred | 1,000,000.00 |
| Loan receivable - Forged Steel Yoke Corporation | 20,300.00 |
| Account receivable - Merchants' Dispatch Transport | |
| Corporation | 8,854.74 |
| Mortgage receivable - E. J. Ellis | 200.00 |
| Ann Arbor trust notes res | 11,000.00 |
| Prepaid capital stock tax | 2,731.00 |
| Cash | 591,079.50 |
| Sinking fund - first mortgage bonds | 1,452,815.00 |
| Sinking fund - preferred stock | 758,110.71 |
| Preferred stock redeemed | 852,000.00 |
| Total | 5,563,047.73 |
| Liabilities | |
| Accrued taxes and interest | $2,052.00 |
| Due Magothy Corporation | 2,259,106.28 |
| First mortgage bonds | 1,339,000.00 |
| Premium and interest due on bonds | 113,233.71 |
| Preferred stock (called for redemption on Dec. 31, 1924) | 1,500,000.00 |
| Premiums and dividends on preberred | 109,942.60 |
| Total | 5,323,334.63 |
| Excess of assets over liabilities | 239,713.10 |
*871 (23) During the period December 17 to December 31, 1924, a portion of the preferred shares in and a portion of the bonds of the Delaware company were redeemed with funds which had been deposited with the Chase National Bank for that purpose.
(24) The following is a statement, as of December 31, 1924, of the assets and liabilities taken over from the Delaware company by *723 Magothy, at the figures at which they appeared on the books of the Delaware company, except that the liability items "Premiums and interest due on bonds, $111,817.50" and "Premiums and dividends on preferred, $15,725" did not appear upon the books:
| Assets | |
| Notes receivable - the Symington Corporation | $350,000.00 |
| Interest - the Symington Corporation | 3,750.00 |
| Excess current assets - the Symington Co | 511,206.78 |
| Stock - the Symington Corporation | 1,000.00 |
| Loan receivable - Forged Steel Yoke Corporation | 20,300.00 |
| Account receivable - Merchants' Dispatch Transport Corporation | 8,854.74 |
| Mortgage receivable - E. J. Ellis | 200.00 |
| Ann Arbor trust notes | 11,000.00 |
| Prepaid capital stock tax | 2,731.00 |
| Sinking fund - first mortgage bonds | 1,427,898.79 |
| Sinking fund - preferred stock | 108,393.07 |
| Preferred stock redeemed | 1,407,500.00 |
| Total | 3,852,834.38 |
| Liabilities | |
| Accrued taxes and interest | $2,052.00 |
| Due Magothy Corporation | 668,026.78 |
| First mortgage bonds | 1,315,500.00 |
| Premium and interest due on bonds | 111,817.50 |
| Preferred stock (called for redemption on Dec. 31, 1924) | 1,500,000.00 |
| Premiums and dividends on preferred stock | 15,725.00 |
| Total | 3,613,121.28 |
| Excess of assets over liabilities | 239,713.10 |
*872 (25) On December 17, 1924, the Chase National Bank began purchasing common shares in the Delaware company, at $50 per share, and at December 31, 1924, it had so purchased a total of 17,670 of such shares at a total cost of $883,500. Between January 1 and March 2, 1925, it purchased an additional 81,770 such shares at a total cost of $4,088,500. The remaining 560 shares outstanding were acquired at a later date, but apparently prior to March 9, 1925.
Exchange of Delaware Corporation Shares for Like Number of Magothy Corporation Shares and Subsequent Redemption.
(26) On January 6, 1925, Donald Symington, acting for himself and his associates under the agreement of December 15, 1924, referred to in paragraph (14), supra, offered to assign to Magothy 30,000 common shares in the Delaware company in exchange for 30,000 shares of the fully paid nonassessable no par value stock of that corporation. The offer was accepted on the same day. On the following day, January 7, Magothy received the 30,000 common shares in the Delaware company, 10,000 from T. H. Symington, 4,500 from Donald Symington, 3,500 from John F. Symington, 4,000 from Elsie J. Symington, 5,000 from Emily H. *873 Symington, and 3,000 from Elizabeth L. Symington, and, in exchange therefor, issued 30,000 of its own shares to those individuals on a share for share basis.
(27) The common shares in the Delaware company paid in to Magothy by T. H. Symington, Donald Symington, and John F. Symington were the same shares which had been received by those *724 individuals as of October 1, 1920, in exchange for their common shares in the Maine company. The 4,000 shares paid in by Elsie J. Symington were the same shares which she received as a gift on July 25, 1923, from Donald Symington. As to the basis of these shares in the hands of those four transferors, the parties have stipulated as follows:
That on and prior to November 25, 1924, the basis of the common stock of the T. H. Symington Company (Delaware) held by T. H. Symington, Donald Symington, Elsie J. Symington and John F. Symington, for the purpose of computing gain or loss upon the subsequent sale or other disposition thereof in these proceedings, was $50 per share, and that, in redetermining the deficiencies in the instant proceedings, the Board may treat this as the cost basis of said common stock in the hands of said parties on*874 that date.
The 5,000 shares paid in by Emily H. Symington were the same shares which she received as a gift on December 15, 1920, from W. S. Symington, Jr. The 3,000 shares paid in by Elizabeth L. Symington were part of the same 7,260 shares which she received as a gift on December 15, 1920, from Charles J. Symington.
(28) On January 8, 1925, the Magothy Corporation surrendered the certificates for the 30,000 shares in the Delaware company and there was issued to it, in the place of those certificates, one certificate for the entire 30,000 shares. On the same day it surrendered this new certificate to the Chase National Bank and received $1,500,000 in payment for the 30,000 shares evidenced thereby. Out of that sum of $1,500,000 Magothy used $1,367,000 to repay the balance due on the loan made by the Chase National Bank to Donald Symington for the benefit of Magothy.
Liquidation of the Symington Corporation.
(29) The 10,000 shares in the Symington Corporation, representing all of its outstanding stock, included among the assets of the Delaware company taken over by Magothy were never transferred to the name of Magothy on the books of the Symington Corporation. On*875 January 24, 1925, the shareholders of the Symington Corporation authorized the officers and directors to dissolve the corporation, and the directors directed the officers to take the proper legal steps to bring about the dissolution and surrender the charter. The corporation was formally dissolved on or about March 1, 1925, and its assets and liabilities were taken over at that time by Magothy, its sole shareholder.
(30) The assets and liabilities of the Symington Corporation taken over by Magothy had a book value of the books of the Symington Corporation, and a fair market value as of the date taken over, as follows:
| Book value | Fair market value | |
| ASSETS | ||
| Cash | $361,757.36 | $361,757.36 |
| 81,000 shares of National Steel Car | ||
| Corporation, Ltd | 1,425,000.00 | 1,215,000.00 |
| Notes receivable - loan to Gibson | ||
| Island Co | 45,000.00 | 45,000.00 |
| Mortgage receivable - Hugh McHugh | 300.00 | 300.00 |
| Total | 1,832,057.36 | 1,622,057.36 |
| LIABILITIES | ||
| Account to Magothy Corporation | 353,750.00 | 353,750.00 |
| Capital | 1,000,000.00 | 1,000,000.00 |
| Surplus | 478,307.36 | 268,307.36 |
| Total | 1,832,057.36 | 1,622,057.36 |
*725 (31) The amount of $1,425,000 at which the 81,000 shares*876 in the National Steel Car Corporation, Ltd., were carried on the books of the Symington Corporation represented the cost of those shares to the latter corporation. The 81,000 shares constituted 81 percent of the outstanding capital stock of the National Steel Car Corporation, Ltd. They were entered on the books of Magothy at $1,425,000.
(32) There was no change in the fair market value of the assets of the Symington Corporation between December 12, 1924, and March 1, 1925.
(33) The rights of Donald Symington under the joint contract to purchase the assets of the Delaware company, as limited by the division-of-rights agreement of December 5, 1924, with Charies J. Symington, had a fair market value on December 12, 1924, the day he assigned those rights to Magothy, of $900,000.
(34) From January 8, 1925, until March 22, 1926, the shareholders in Magothy were as follows:
| Shares owned | |
| T. H. Symington | 10,000 |
| Donald Symington | 4,500 |
| John F. Symington | 3,500 |
| Elsie J. Symington | 4,000 |
| Emily H. Symington | 5,000 |
| Elizabeth L. Symington | 3,000 |
| Total | 30,000 |
On March 22, 1926, the certificates for 4,500 shares issued to Donald Symington were canceled and*877 a new certificate for 4,500 shares issued to Martha P. Symington. On August 14, 1926, a certificate for 4,500 shares issued to Martha P. Symington was conceled and a certificate for 4,500 shares was issued to the Patapsco Corporation. On August 14, 1926, the certificate of Elsie J. Symington for 4,000 shares was canceled and a new certificate issued to her for 1,000 shares and a certificate for 3,000 shares was issued to the Patapsco Corporation. On August 20, 1926, the certificate for 3,500 shares issued to John F. Symington was canceled and a certificate for 3,500 shares was issued to the Patapsco Corporation.
*726 (35) On October 1, 1927, T. H. Symington offered to assign to T. H. Symington & Son, Inc., 10,000 shares in Magothy in exchange for 5,000 fully paid nonassessable no par value shares in the first mentioned company. The offer was accepted on October 4, 1927. The 10,000 shares in Magothy were the same shares which had been issued to T. H. Symington on January 7, 1925, in exchange for a like number of shares in the Delaware company. On December 13, 1927, the certificate for 10,000 shares in Magothy issued to T. H. Symington was canceled and a new certificate*878 for 10,000 shares was issued to T. H. Symington & Son, Inc. On December 16, 1927, T. H. Symington owned 5,500 of a total of 5,550 outstanding shares in T. H. Symington & Son, Inc.
Gibson Island Co. Stock.
(36) In 1920 or 1921, W. S. Symington, Jr., began the development of Gibson Island, which lies at the mouth of the Magothy River in Chesapeake Bay. In 1921 or 1922 his resources became exhausted and he sought financial assistance from his brothers, T. H., John F., Charles J., and Donald Symington, herein called the "Symington individuals." The Symington individuals, through Donald Symington, who acted as their agent in the matter, made advances to the Gibson Island Co. in the approximate total amount, to January 8, 1925, of $867,000. These advances were evidenced by notes of the Gibson Island Co. The funds so advanced were obtained by Donald Symington by borrowing upon the personal notes of the Symington individuals, secured by some 66,000 shares (the controlling interest) in the Delaware company.
(37) In 1922 the Symington individuals caused an investigation to be made of the Gibson Island Co. and its prospects by one E. H. Bouton, whom they regarded as an outstanding*879 expert in the matter of the development of suburban real estate. Bouton reported that the real estate development owned by the Gibson Island Co. could be carried to a profitable conclusion and recommended the continuance of the development. After further negotiations, Bouton was employed as president of the Gibson Island Co.
(38) In January 1923 Donald Symington, acting as agent for a syndicate composed of the Symington individuals, entered into an agreement with the said E. H. Bouton under which the syndicate agreed to loan $500,000 to the Gibson Island Co.; Bouton agreed to subscribe for $50,000 per value of the preferred and 500 of the common shares in the Gibson Island Co., payable in installments; the syndicate agreed to loan $50,000 to Bouton, with which to pay his subscription for said shares in the Gibson Island Co., the loan to be made from time to time as installments on Bouton's subscription *727 became due and payable, and the amounts loaned to be evidenced by promissory notes bearing interest at 6 percent per annum and due January 1, 1928; Bouton agreed to pledge $100,000 par value of common shares in the Roland Park Co. as collateral security for the loan*880 to be made to him by the syndicate; Bouton also agreed that all sums received by him from the Gibson Island Co., or others, through the sale of the stock for which he subscribed or any part thereof, or through the sale of his subscription or any part thereof or interest therein, or through the redemption of the said stock or any part thereof, or by way of distribution on liquidation to the holders of preferred shares in the said company, or by way of salary from the said company, should be applied on account of the syndicate loan until said loan, with interest, had been paid in full; and the syndicate agreed that if Bouton, for any reason, should cease to be president of the company prior to January 1, 1928, it would, on demand, purchase Bouton's subscription or shares, or any part thereof, at the price paid for the same by Bouton, with interest at 6 percent per annum, on surrender to its agent of the amount of any and all dividends theretofore declared, or received by Bouton, on the stock so purchased by its agent.
(39) One of the main purposes in organizing Magothy was to provide a means for relieving the controlling shares in the Delaware company from their pledge as security*881 for the loans made to the Symington individuals, mentioned in paragraph 36. Magothy made loans to the Gibson Island Co. as follows:
| January 8, 1925 | $867,000 |
| January 27, 1925 | 15,000 |
| February 13, 1925 | 18,000 |
| April 9, 1925 | 10,000 |
| April 15, 1925 | 13,200 |
| Total | 923,200 |
These loans were evidenced by notes of the Gibson Island Co. The loan of $867,000 was paid to Donald Symington, who, in turn, paid off the secured bank loans obtained by the Symington individuals for the benefit of the Gibson Island Co.
(40) In February 1925 the Symington individuals were unable to borrow any more funds for the purpose of making advances to the Gibson Island Co. However, the bank advised that it would make loans direct to the Gibson Island Co. if the latter would get its obligations to Magothy "out of the way." On February 12, 1925, Magothy acquired from the Gibson Island Co. 9,232 preferred and 11,282 common shares in the latter company, transferring and releasing in payment therefor the notes of the Gibson Island Co. referred to in paragraph (39).
*728 (41) Upon the acquisition by Magothy of the common and preferred shares in the Gibson Island Co. referred to in*882 the preceding paragraph, it took over and assumed the liability of the syndicate under the contract with E. H. Bouton, referred to in paragraph (38).
(42) On March 1, 1926, Magothy entered into an agreement with E. H. Bouton whereby it agreed, in consideration of Bouton's causing his stock in the Gibson Island Co. to be voted in favor of an amendment of the charter of the company providing for the elimination of clauses 4 and 5 of article sixth, which clauses provided for a redemption fund for the preferred stock and gave holders of preferred shares the right to make payment on contracts for the purchase of land in preferred stock, that if Bouton, or any assignee or transferee of his stock, should request the Gibson Island Co. to accept such stock in payment on the purchase price of lots and the Gibson Island Co. should fail to accept the stock, then Magothy would upon demand of Bouton, or any assignee or transferee of his stock, purchase his said stock at a price of $105 per share plus accrued dividends.
(43) In the early part of 1927 E. H. Bouton resigned as president of the Gibson Island Co. and under date of May 2, 1927, he demanded manded that Donald Symington, as agent*883 for the syndicate referred to in paragraph (38), purchase 368 preferred shares in the Gibson Island Co., then held by Bouton, at a price of $36,800 plus accrued interest thereon at 6 percent from December 31, 1923, in accordance with the agreement of January 1923. That demand was repeated by Bouton on October 31, 1927, and again on November 15, 1927. On January 26, 1928, Magothy paid to Bouton the sum of $47,999.47, the voucher check containing the following statement:
| Purchase of 368 shares of the Preferred Stock and 368 shares of the Common Stock of The Gibson Island Company | $36,800.00 |
| Interest at 6% from Jan. 1, 1923 to Jan. 26, 1928, incl | 11,199.47 |
| Total | $47,999.47 |
In full settlement of all claims arising out of an agreement dated January, 1923 between Edward H. Bouton and Donald Symington, Agent, acting for a syndicate composed of T. H. Symington, W. S. Symington, Jr., John F. Symington of S. C. J. Symington and Donald Symington, and an agreement dated March 1, 1926 between said Edward H. Bouton and Magothy Corporation, and in full release and discharge of the aforesaid Donald Symington, Agent, and syndicate and the said Magothy Corporation, their and*884 each of their heirs, executors, administrators, successors and assigns of and from any and all actions, causes of actions, suits, claims and demands whatsoever which the said Edward H. Bouton ever had or now has by reason of the above recited agreements.
(44) Under date of December 13, 1927, T. H. Symington made an offer to purchase from Magothy for a total consideration of $150,000, *729 9,232 shares of preferred stock and 17,532 shares of common stock of the Gibson Island Co. That offer was accepted by the directors of the Magothy Corporation on December 13, 1927, by appropriate resolution. The action of the directors of Magothy was confirmed by the shareholders of the corporation on December 23, 1927, by appropriate resolution. Payment for these shares was made by T. H. Symington as follows: $85,000 in cash on December 22, 1927, and an interest-bearing promissory note for $65,000, due January 24, 1928, which note was paid on the due date thereof.
(45) The Gibson Island Co. had surplus deficits of $40,013.53 on May 31, 1926, $100,207.23 on December 31, 1926, $176,537.27 on November 30, 1927, and $213,663.07 on December 31, 1927. The following statement shows the*885 assets, liabilities, and net worth of the Gibson Island Co. as per its books as of November 30 and December 31, 1927:
| Date | Assets | Liabilities | Net worth |
| Nov. 30, 1927 | $1,371,696.24 | $579,133.51 | $792,562.73 |
| Dec. 31, 1927 | 1,335,248.13 | 579,811.20 | 755,436.93 |
The assets as shown in the above statement are stated at book cost figures.
Transferee Liability and Liquidating Dividends.
(46) During the period March 15, 1925, to September 28, 1927, Magothy paid quarterly dividends of 75 cents per share on all of its outstanding capital stock.
(47) The following is a balance sheet of the Magothy Corporation, as shown by its books November 30, 1927:
| Assets | Liabilities | |||
| Notes receivable | $25,000.00 | Capital stock - | ||
| 30,000 no par shares | $1,500,000.00 | |||
| Investments: | Surplus | 926,892.07 | ||
| National Steel Car | ||||
| Corporation, Ltd | $1,425,000 | |||
| Gibson Island Co | 923,200 | |||
| 2,348,200.00 | ||||
| Cash | 53,692.07 | |||
| Total | 2,426,892.07 | Total | 2,426,892.07 |
(48) On December 1, 1927, Magothy sold 81,000 shares in the National Steel Car Corporation, Ltd., and received $2,215,000 in payment therefor.
(49) The sale of the 81,000*886 shares in the National Steel Car Corporation, Ltd., referred to in the preceding paragraph, was approved by the directors of the Magothy Corporation on December 10, 1927. *730 On the same day the directors of the Magothy Corporation declared a dividend of $10 per share on the outstanding shares in that corporation, payable December 20, 1927, to stockholders of record December 15, 1927. The dividend was paid as follows:
| Stockholders | Shares owned | Dividends |
| Elsie J. Symington | 1,000 | $10,000 |
| Emily H. Symington | 5,000 | 50,000 |
| Elizabeth L. Symington | 3,000 | 30,000 |
| The Patapsco Corporation | 11,000 | 110,000 |
| T. H. Symington & Son, Inc | 10,000 | 100,000 |
| Total | 30,000 | 300,000 |
(50) The petitioners, Elsie J. Symington, Emily H. Symington, and Elizabeth L. Symington, reported the dividend of $10 per share paid by Magothy Corporation on December 20, 1927, referred to in the preceding paragraph, as ordinary dividends in their respective income tax returns for 1927.
(51) At the close of business on December 1, 1927, Magothy had an earned surplus of $1,716,892.07, and it had cash on hand amounting to $2,268,692.07. At the close of business on December 20, 1927, after*887 the payment of the dividend of $10 per share on the outstanding stock, the Magothy Corporation had an earned surplus of $1,413,846.09, cash on hand of $990,656.09, and demand loans receivable of $1,000,000.
(52) Under date of December 27, 1927, Elizabeth L. Symington and Emily H. Smyington sent letters to Magothy offering to sell it 3,000 shares and 5,000 shares respectively, of Magothy no par common stock at $70 per share. The offers were accepted by the directors of the Magothy Corporation on December 27, 1927, by an appropriate resolution subject to ratification by the stockholders. That action of the directors of Magothy Corporation was confirmed by the shareholders of the corporation on January 6, 1928, by appropriate resolution. The share certificates of Elizabeth L. and Emily H. Symington were delivered to Magothy and no new certificates representing the 8,000 shares were thereafter issued by the corporation.
(53) At the close of business on January 6, 1928, after the purchase of the 8,000 shares referred to in the preceding paragraph, Magothy had an earned surplus of $481,661.24, and cash on hand amounting to $616,661.24.
(54) On January 7, 1928, the directors of*888 Magothy declared a dividend of $20 per share, payable on January 9, 1928, to the shareholders of record on January 7, 1928. The dividend was paid on *731 January 9, 1928, to the following shareholders in the amounts shown:
| Stockholders | Shares owned | Dividends |
| Elsie J. Symington | 1,000 | $20,000 |
| Patapsco Corporation | 11,000 | 220,000 |
| T. H. Symington & Son, Inc | 10,000 | 200,000 |
| Total | 22,000 | 440,000 |
(55) At the close of business on January 9, 1928, after the payment of the dividend of $20 per share referred to in the preceding paragraph, Magothy had an earned surplus of $41,661.24, and cash on hand amounting to $176,661.24.
(56) On January 13, 1928, the treasurer of Magothy, acting for and in behalf of the corporation, but without any written recorded authorization of its directors or shareholders, purchased at $50 per share the following shares in that corporation:
| Stockholders | Shares |
| Elsie J. Symington | 1,000 |
| Patapsco Corporation | 6,000 |
| T. H. Symington & Son, Inc | 5,000 |
| Total | 12,000 |
(57) On January 21, 1928, the treasurer of Magothy, acting for and in behalf of the corporation, but without any written recorded authorization*889 of its directors or shareholders, purchased at $50 per share the following shares in that corporation:
| Stockholders | Shares |
| Patapsco Corporation | 4,000 |
| T. H. Symington & Son, Inc | 4,000 |
| Total | 8,000 |
(58) On January 25, 1928, the directors of Magothy ratified the action of its treasurer in purchasing 20,000 shares of its stock at $50 per share, referred to in paragraphs (56) and (57), and at the same meeting the board of directors passed a resolution to liquidate the corporation and authorized its vice president and secretary to assign all remaining assets of the corporation to its remaining stockholders.
(59) After the purchases by its treasurer of 20,000 shares in the Magothy Corporation on January 13 and January 21, 1928, as set forth in paragraphs (56) and (57), there remained outstanding only 2,000 shares in that corporation, of which 1,000 shares were held by the Patapsco Corporation and 1,000 shares by T. H. Symington & Son, Inc.
*732 (60) On the same day, January 25, 1928, the shareholders ratified the directors' action in approving the action of the treasurer in purchasing 20,000 shares of the corporation's outstanding stock, and adopted*890 a resolution to dissolve the corporation. Also on January 25, 1928, Magothy entered into an agreement with its two remaining stockholders, T. H. Symington & Son, Inc., and the Patapsco Corporation, whereby Magothy assigned one-half of all its remaining property, assets, and claims of every kind and description to the Patapsco Corporation and the remaining half to T. H. Symington & Son, Inc., and the Patapsco Corporation and T. H. Symington & Son, Inc., covenanted and agreed with each other to each assume one-half of all the liabilities of the Magothy Corporation, the obligations of the Patapsco Corporation so assumed to be guaranteed by Donald Symington and the obligations of T. H. Symington & Son, Inc., so assumed to be guaranteed by T. H. Symington.
(61) On February 2, 1928, assets of Magothy, consisting of cash in the sum of $96,011.72 and 368 preferred and 368 common shares in the Gibson Island Co., were transferred in equal amounts to the Patasco Corporation and T. H. Symington & Son, Inc., who were then the only remaining shareholders in Magothy. These were the only assets then remaining in the hands of the Magothy Corporation. The Magothy Corporation was dissolved and*891 its charter canceled on March 15, 1928.
Facts Relating to Miscellaneous Issues.
(62) In April 1928 the respondent assessed a capital stock tax of $2,630 against Magothy for the period July 1, 1925, to June 30, 1926. This tax was paid by check of the Patapsco Corporation dated June 5, 1928. Magothy kept its books on an accrual basis.
(63) The 368 common and 368 preferred shares in the Gibson Island Co. which were distributed to the Patapsco Corporation and T. H. Symington & Son, Inc., in equal parts, as set forth in paragraph (61), were the shares which Magothy had acquired from E. H. Bouton, referred to in paragraph (43). The one-half of that stock which was delivered to the Patapsco Corporation was immediately turned over by it to T. H. Symington & Son, Inc.
(64) The said 368 common and 368 preferred shares in the Gibson Island Co. which were held by Magothy at the time of its dissolution had a fair market value, as of February 2, 1928, of $5,980.
(65) Under the terms of the transfer by the Delaware company of all of its assets and liabilities to the Maryland company and Magothy, in connection with the 1924 - 1925 transactions, the Maryland company assumed all*892 of the current liabilities of the Delaware company, but *733 it was to have such amount of the current assets, in addition to the other assets which it took over, as would exceed the current liabilities of the Delaware company, as of December 31, 1924, by $1,500,000. Magothy was to have the remaining current assets. Upon the basis of figures on the Delaware company's books, the current assets transferred by that company to the Maryland company exceeded the current liabilities by $511,206.78 more than $1,500,000. The Delaware company set up an account receivable on its books against the Maryland company for the amount of that excess. This account was among the assets transferred to Magothy. On March 5, 1925, there was an account stated and settlement between the Maryland company and Magothy, which took into account current assets and liabilities which did not appear upon the Delaware company's books. After that settlement certain expenditures were made by the Maryland company in liquidation of additional liabilities of the Delaware company and in connection with the organization of itself and Magothy and the transfer of the assets and liabilities of the Delaware company. *893 The Maryland company billed those expenditures to and was reimbursed by Magothy. These expenditures were as follows:
(a) Payment of $10,719.50 to Cotton & Franklin, for legal services in connection with the consummation of the contract between Charles J. Symington and the bankers, referred to in paragraph (16). Cotton & Franklin did not render any services to the Magothy Corporation.
(b) Payment of $12,739.08 to Janney, Ober, Slingluff & Williams, made up as follows: (1) For legal services in connection with the organization of the Maryland company and the Magothy Corporation; acquisition by those companies of the assets of the Delaware company; and issuance of the securities of those companies, opinions in connection therewith, etc., $10,000; (2) disbursements in connection with the organization and transfer of assets to the Maryland company, $1,901.53; and (3) disbursements in connection with the organization and transfer of assets to the Magothy Corporation, $837.55.
(c) Payment of $8,152.40 to Ernst & Ernst, for services rendered in "making examination of books of T. H. Symington Company [Delaware company] at October 31, 1924 including a verification of assets and*894 liabilities, review of income and expenses for thirteen years and ten months, checking inventory records as to prices, conferences with officials and bankers, preparation of balance sheet of The Symington Company and statement of earnings adjusted to basis of purchase contract."
(d) Payment of $1,970.57 to American Appraisal Co. for services in making appraisals of plants and property of the Delaware company at Rochester, New York.
*734 (e) Payment of $481.10 to Barrow, Wade, Guthrie & Co. for services in making an interim audit of the Delaware company.
(66) In addition to the items mentioned in the preceding paragraph, Magothy paid $2,894.94 to Ernst & Ernst for services rendered to the Delaware company in making an examination of the latter's books as of December 31, 1924.
(67) No part of the items referred to in paragraphs (65) and (66) were included by the respondent in the cost to Magothy of its shares in the Symington Corporation for the purpose of computing the gain upon liquidation of the Symington Corporation in 1925.
(68) Among the assets taken over by Magothy from the Delaware company on December 17, 1924, were 10,000 preferred shares in the Locke Insulator*895 Corporation. On the books of the latter these shares remained in the name of the Delaware company until redeemed. On December 30, 1924, these shares were called for redemption on February 1, 1925, at $105 per share and accrued dividends to the date of redemption. They were actually redeemed and canceled on December 30, 1924, by the Locke Insulator Corporation paying $1,067,500 to the Delaware company on that date, which included $17,500 for dividends to December 31, 1924. On the same day, December 30, the Delaware company paid to the Chase National Bank an amount of $1,056,373.72, representing the par value of said preferred shares plus a portion of the premium received thereon in the amount of $39,085 and the dividend in the amount of $17,288.72, which amount was used to reduce the loan of $2,259,106.28 obtained by Donald Symington on behalf of Magothy, as referred to in paragraph (18). In its 1925 return Magothy reported a profit of $39,085 upon the liquidation of the shares in the Locke Insulator Corporation. The respondent held that the profit was income for 1924.
(69) In its return for 1926, Magothy reported the receipt of a liquidating dividend of $25,000 from the Lexington*896 Machine Corporation. In 1927 Magothy paid a Federal income tax of $3,149.86 due from the liquidating corporation. The respondent refused to allow that payment as a deduction from the income of Magothy for the year 1927.
(70) No books or records were kept for Magothy from date of organization until February 28, 1925. Its books were opened by entries made February 28, 1925, recording the status, as of that date, of the assets and liabilities taken over from the Delaware company.
(71) Magothy did not file an income tax return for the period December 2 to December 31, 1924, until April 3, 1925. On the latter date, a return for that period was filed with the collector of internal revenue at Baltimore, Maryland. The delay of Magothy in filing its return for the period in question was not due to reasonable cause.
*735 Waivers - Statute of Limitations.
(72) Magothy filed with the collector of internal revenue, Baltimore, Maryland, a tentative income tax return for the calendar year 1925 on March 13, 1926. A completed return for the same year was filed on May 15, 1926.
(73) On March 12, 1930, the respondent assessed the following deficiencies, penalty and interest*897 against Magothy: For the period December 2 to December 31, 1924, a deficiency of $4,884.87, penalty of $1,221.22, and interest of $1,461.11; for 1925, a deficiency of $121,732.64, and interest of $29,107.44; for 1926, a deficiency of $2,568.84, and interest of $460.10; for 1927, a deficiency of $107,931.27, and interest of $12,855.65.
(74) Under date of January 11, 1929, the following consent fixing the period of limitation upon assessment of income and profits taxes was executed:
In pursuance of the provisions of existing Internal Revenue Laws, Magothy Corporation, a taxpayer located at 1000 Standard Oil Building, Baltimore, *736 Maryland, and the Commissioner of Internal Revenue hereby consent and agree as follows:
That the amount of any income, excess-profits, or war-profits taxes due under any return made by or on behalf of the above named taxpayer for the year ending December 31, 1925, under existing acts, or under prior revenue acts, may be assessed at any time on or before December 31, 1929, except that, if a notice of a deficiency in tax is sent to said taxpayer by registered mail on or before said date, then the time for making any assessment as aforesaid shall*898 be extended beyond the said date by the number of days during which the Commissioner is prohibited from making an assessment and for sixty days thereafter.
[Signed] MAGOTHY CORPORATION,
Taxpayer.
By: L. A. TOWNSEND,
V. P. and Treasurer.
Attest:
R. N. DORNEY,Asst. Sec'y.
[Signed] D. H. BLAIR,
Commissioner.
By: G. ELMER BROWN,
Internal Revenue Agent, in Charge.
This consent contains an imprint of the seal of the Magothy Corporation.
(75) Under date of November 18, 1929, the following consent fixing the period of limitation upon assessment of income and profits taxes was executed:
In pursuance of the provisions of existing Internal Revenue Laws, Magothy Corporation, a taxpayer located at 1004 Standard Oil Building, Baltimore, Maryland, and the Commissioner of Internal Revenue hereby consent and agree as follows:
That the amount of any income, excess-profits, or war-profits taxes due under any return made by or on behalf of the above-named taxpayer for the year ending December 31, 1925, under existing acts, or under prior revenue acts, may be assessed at any time on or before December 31, 1930, except that, if a notice of a deficiency*899 in tax is sent to said taxpayer by registered mail on or before said date, then the time for making any assessment as aforesaid shall be extended beyond the said date by the number of days during which the Commissioner is prohibited from making an assessment and for sixty days thereafter.
[Signed] MAGOTHY CORPORATION,
Taxpayer.
By: L. A. TOWNSEND,
V.P. and Treasurer.
[Signed] D. H. BLAIR,
Commissioner.
By: G. ELMER BROWN,
Internal Revenue Agent, in Charge.
This consent is not attested, but it bears an imprint of the seal of the Magothy Corporation.
(76) At the time of the dissolution of the Magothy Corporation, the directors of that corporation were T. H. Symington, Thomas R. Symington, Donald Symington, W. S. Symington, III, and L. A. Townsend. Townsend did not receive specific authority from his four associate directors to execute the consents set forth in paragraphs (74) and (75).
OPINION.
BLACK: 1. The question presented by this issue is whether or not Magothy realized a gain of $39,085 in 1924 upon the redemption in that year of 10,000 preferred shares in the Locke Insulator Corporation. Magothy reported that amount of gain in*900 its 1925 return, but the respondent determined that the gain was income for 1924. The petitioner now contends that no gain was realized in the transaction, though it does not dispute that, if any taxable gain did result, it was income for 1924. The amount received by Magothy is not in controversy, but the cost of the redeemed shares is. The facts pertaining to the issue are set forth in paragraph (68) of our findings.
The shares in question were part of the assets acquired by the Magothy Corporation in 1924 from the Delaware company, the facts of which are set forth in paragraphs (10) to (24), inclusive, of our findings. As consideration for all of the assets so acquired, Magothy paid $500,000 and assumed all of the Delaware company's liabilities, except such as were assumed by the Maryland company, also a party to the transaction, including the liability to retire the outstanding preferred shares and bonds of the Delaware company. The transfer of such of the assets of the Delaware company as were acquired *737 by Magothy was effected on December 17, 1924. The parties agree that the transaction constituted an outright purchase by Magothy and not a statutory reorganization*901 within the meaning of the applicable revenue acts. The shares were redeemed on December 30, 1924. As the shares had not been transferred to Magothy on the books of the Locke Insulator Corporation, payment of the redemption price was made by the Locke Insulator Corporation to the Delaware company, which in turn made payment thereof to the Chase National Bank, to be applied in reduction of the loan obtained by Donald Symington, referred to in paragraph (18) of our findings, for the benefit of Magothy. In that respect it must be presumed that the Delaware company acted in accord with instructions of Magothy, since the proceeds of the redemption were the property of Magothy and not of the Delaware company.
The foregoing facts disclose a completed redemption in 1924 of the Locke Insulator preferred shares for cash. It follows that any gain upon the exchange was realized in 1924 and is taxable as income for that year; and this we understand is not now disputed by the petitioner. The petitioner argues, however, that "the entire transaction must be viewed as a purchase by Magothy for the sum of $500,000 of whatever assets remained after the liquidation of all liabilities, and any assets*902 which were liquidated during the course of the general liquidation did not give rise to any profit or loss but merely tended to increase or reduce the cost to Magothy of the assets finally taken over." Stating the proposition more simply and in terms of its ultimate effect, it is that the liabilities of the Delaware company assumed by the Magothy Corporation should be offset against the proceeds from dispositions of the acquired assets and none of such proceeds subjected to tax, and that the excess of such proceeds over the assumed liabilities should be added to the remaining assets and the total thereof regarded as having been purchased for $500,000. This we think is not a correct theory of income taxation. Not only does it resort to the use of improper bases for computing gains and losses upon the dispositions of assets made in the period of liquidation of the assumed liabilities, but the logical result of their use is to project realized gains into the computation of net income of later accounting periods when they were not realized. "It is well settled that where property is acquired en bloc or en masse and subsequently sold in lots or parcels, a computation of gain*903 or loss must be made upon each separate sale and the result reported in the tax return and not held in abeyance or suspense until the entire cost of the property is recovered." , and cases cited therein. The rule is applicable to the redemption of the Locke Insulator shares in this case, and the *738 gain or loss upon that redemption must be computed upon the cost basis for those shares and recognized in computing net income for 1924.
In computing the gain to Magothy upon the redemption, the respondent used a cost basis of $1,000,000, which was the par value of the shares. Petitioner contends that the cost of the said shares was not less than $1,039,850, the amount received in the redemption thereof.
Magothy agreed to pay a stated consideration for the acquired assets - $500,000 in cash and payment of such of the liabilities of the Delaware company as were not assumed by the Maryland company. Each of the acquired assets must bear its fair share of the cost represented by that consideration, and, when determined, that share is the basis for computing gain or loss upon any later disposition of that particular asset. *904 Based upon asset and liability values on the books of the Delaware company, the total consideration paid by Magothy exceeded the book value of assets by $260,286.90. The respondent found the excess to be $290,346.19, but that included items that did not appear on the Delaware company's books, and he ascribed the whole amount of that excess as cost of the shares in the Symington Corporation, which were acquired from the Delaware company at the same time as the shares in the Locke Insulator Corporation and which were carried on the books of the Delaware company at $1,000. The question is whether or not any part of that excess may be ascribed as cost of the Locke Insulator preferred shares, and we are unable to answer that because of the lack of sufficient evidentiary facts upon which to base a conclusion.
The petitioner contends that $39,085 of the excess should be allocated to the redeemed shares, fixing the cost of those shares at $1,039,850. Its sole justification for this is the fact that the shares were actually redeemed on December 30, 1924, 13 days after their acquisition by Magothy, for $1,067,500. However, the situations were different on the two dates. On December 30, 1924, the*905 shares were called for redemption at 105 percent of par, plus accrued dividends, and there was an accrued liability on the part of the Locke Insulator Corporation to pay the redemption price thereof. On December 17, 1934, the date of acquisition, the shares had not been called, and there is nothing in the record that indicates that their call was even contemplated at that time. There is no direct evidence as to the fair market value of the shares on that date. The share certificates are not in evidence, so that we know nothing about the terms of issue, the dividend rate, or when and how the shares were redeemable. We have no evidence as to the financial status of the Locke Insulator Corporation, the value of the assets represented by *739 these shares, the corporate earnings, or the dividend history in respect of these shares. In short, we have no evidence upon which we can make an independent determination of their fair market value at the date of acquisition. We have no evidence which would justify us in overturning the cost of $1,000,000 allocated by the respondent to these shares.
On this issue the respondent's determination is sustained.
2. The issue here is*906 whether or not Magothy is liable for the 25 percent penalty prescribed by section 3176 of the Revised Statutes, as amended by section 1003 of the Revenue Act of 1924, for failing to file its 1924 income tax return within the time prescribed by law.
Magothy came into existence on December 2, 1924. It succeeded, by purchase, to certain of the assets and business of the Delaware company on December 17, 1924. It transacted business in the period December 2 to December 31, 1924, from which it derived a gain of $39,085. Its first taxable year was the period December 2 to December 31, 1924. It filed its 1924 return on April 3, 1935.
Section 239(a) of the Revenue Act of 1924 requires every corporation subject to the income tax to make a return of its income, and allowable deductions and credits. By section 241(a), the calendar year return of a corporate taxpayer must be made on or before the 15th day of March of the succeeding year. The 1924 return of Magothy therefore was made more than ten years after the time prescribed by law. Section 3176 of the Revised Statutes, as amended, provides, inter alia, as follows: "In case of any failure to make and file a return or list within*907 the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 percentum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax."
In explanation and as exculpatory circumstances of the failure of Magothy to make and file its return on time, the former vice president and treasurer of that corporation testified as follows: "I was an officer of the Magothy Corporation shortly after the first of the year 1925 and in preparing its accounts, opening entries, etc., I did not take into consideration that there were, possibly, some entries of Magothy in the one month of December, 1924. As a matter of fact, I never discovered the entries or any business of Magothy in the month of December, 1924, the month of its incorporation. Further, the only items of account that I had at that time were the opening entries and it did not occur to me that I should have filed a return for say the 28 days in the month of December, 1924, because I did not feel*908 that there were any transactions during that month *740 regarding the Magothy." We are unable to find in this testimony any reasonable cause for the failure to file the return on time. The fact that it did not occur to the responsible officer that a return should be filed, because he "did not feel that there were any transactions" during the short period in 1924 that the corporation was in existence, is not a mitigating circumstance. Magothy was required by law to make and file a return, regardless of the amount of its income or lack of income. If it was believed that Magothy had not transacted any business and that it had no income from any source, it could have been relieved of the necessity of making a return, upon presentation of the facts to the collector. But in the absence of a proper showing to the collector, it was required to make a return. Art. 621, Regulations 65. Furthermore, the deficiency notice for 1924 was mailed to Magothy on April 4, 1930, five years before it finally made and filed the return. Then it acted only to avoid the mandatory penalty.
The respondent's action in levying the 25 percent penalty for delinquency in filing the return of Magothy*909 for 1924 is sustained. Cf. ; ; .
3. The question raised by this issue is whether or not the assessment and collection of the deficiency against Magothy for 1925 was barred by the statute of limitations at the time the assessment was made. The facts pertaining to the matter are set forth in paragraphs (72) to (76), inclusive, of our findings. Admittedly, the question depends for its solution upon whether or not the consents set forth in the findings are valid and binding upon the taxpayer.
Magothy was dissolved on March 15, 1928. The first consent bears date of January 11, 1929, and purports to extend the statutory period for the assessment of any tax due for 1925 to December 31, 1929. That consent need not be considered further, because the assessment was not made until March 12, 1930, and the deficiency notice was not mailed until April 5, 1930, both of which dates fall beyond the permissible assessment period as extended by that consent. The second consent bears date of November 18, 1929, and purports to extend the*910 statutory period for the assessment of 1925 taxes to December 31, 1930. If the second consent was valid, it was sufficient to extend the period beyond the date of actual assessment. A consent given after the statute has expired is valid and effective. . This second consent was executed in the name of Magothy by L. A. Townsend, vice president and treasurer, and contains an imprint of the corporate seal.
The petitioner contends that Magothy, upon dissolution on March 15, 1928, ceased to exist and could thereafter exercise no corporate function; that its officers became functus officio, without authority *741 to perform any act in the name of the corporation, and that therefore the purported waivers executed by the former vice president and treasurer of the corporation were invalid and void. It is further contended that none but the directors, as trustees in dissolution and liquidation, were empowered to act for or on behalf of Magothy; that the trustee powers of the directors could only be exercised in concert and not individually; that the former vice president and treasurer of the corporation, who was also*911 a director and trustee, had no authority from his cotrustees to execute the waivers; and that, therefore, the waivers executed by him are invalid and void and not binding upon the corporation.
Respondent in his answer affirmatively alleges that at all times material herein L. A. Townsend was a general officer and a director of Magothy, and a trustee of its creditors, stockholders and members, with full power to wind up and settle the affairs of the corporation and, as such general officer, director and trustee, executed income and profits tax waivers for and in behalf of the corporation from time to time under its corporate seal, by virtue of which the Magothy Corporation consented in writing to postponement of the assessment and collection of income taxes due from it for the taxable year involved in this appeal until a time which had not expired when the jeopardy assessments of which it was notified by letter April 4, 1930, were made against it; that the aforesaid consents in writing were duly accepted and acted upon by the respondent, and the petitioner may not now be heard to say they were given without authority, even if such were the case, which is expressly denied.
Article*912 23, sections 95 and 96, of the Maryland Code, 1924, provides as follows:
(95). Upon dissolution of any corporation of this State in any manner otherwise than by judicial proceedings, and until other persons shall be appointed as receivers by some court of competent jurisdiction, the directors at the time of dissolution shall become and be trustees for the creditors, stockholders, and members of the corporation so dissolved. They shall take title to its assets, real and personal, and shall have full power to wind up and settle its affairs, to sue for and collect its assets and to pay its debts; and they shall divide among the stockholders or members, the money and other property that shall remain after the payment of the debts and necessary expenses; and the said trustees shall be jointly and severally liable to the creditors, stockholders and members of such corporation to the extent of its property and effects that shall come into their hands.
(96). The dissolution of a corporation shall not relieve its stockholders or other officers from any obligations and liabilities imposed on them by law; nor shall it abate any pending suit or proceeding by or against the corporation, *913 and all such suits may be continued with such change of parties, if any, as the court in which the same are pending shall direct * * *.
We think the waiver in question was valid and served to remove the bar of the statute of limitations. . *742 In that case the taxpayer was the Lockhart Mills, a South Carolina corporation, which was dissolved May 18, 1919. Waivers were signed and filed in 1923. These waivers were signed in the name of the dissolved corporation by its treasurer. The court upheld the validity of the waivers and its opinion, among other things, said:
Under the statutes of South Carolina, corporations which have been dissolved are continued as bodies corporate to prosecute and defend suits and settle their affairs and the directors become trustees for this purpose. The courts quite generally have upheld the validity of waivers executed by the directors of dissolved corporations during the period in which corporate existence for purposes of liquidation is usually continued by state statutes [citing cases].
The court said in the concluding part of its opinion:
It was to the interest of the*914 taxpayer to have a careful and deliberate examination of its accounts so that the correct amount of its tax could be ascertained; and it is noteworthy that the amount of the tax, as first determined, was subsequently reduced. The execution of the waivers was merely an incidental transaction in the liquidation of the corporate affairs, well within the powers conferred by law.
To the same effect as , are ; certiorari denied, ; and . See also . In support of its contention that the waiver is invalid petitioner strongly relies upon , affirming memorandum opinion of the Board.
We think the facts of that case are distinguishable from those present in the instant case. In the Bryson case the waiver was not signed in the name of the corporation, but by "Elmer D. Bryson, former Sect. of the Bryson-Robison Corp., Taxpayer." When the waiver was forwarded to*915 the Commissioner, Bryson notified the Commissioner that the corporation was dissolved and expressly disclaimed any authority to act for it.
On these facts the court decided that the waiver was invalid to bind the corporation. The majority opinion said in part:
* * * Neither on its face therefore, nor in the light of the accompanying letter from the respondent's attorney, can the document be regarded as a valid waiver. It is signed by a former secretary of the corporation. It does not bear the corporate seal. The attorney's letter emphatically puts the Commissioner on notice that the respondent considers himself only a former officer of the corporation and that he will not presume to act for it.
In the instant case L. A. Townsend, who executed the waiver in behalf of the dissolved corporation, was its vice president and treasurer at the time the corporation was dissolved, and he was also a director. At no time did he notify the Commissioner or claim that he was not acting within the scope of his authority in signing the waiver. On the contrary the evidence shows that the waiver in *743 question was presented to the Commissioner in the regular way to secure a postponement*916 of an assessment against the corporation while the Commissioner continued to examine the question of the corporation's tax liability for the year in question. As said by the court in , "The execution of the waivers was merely an incidental transaction in the liquidation of the corporate affairs, well within the powers conferred by law."
We sustain the validity of the waiver and deny petitioners' plea of the bar of the statute of limitations.
Having held that the waiver in question was valid to bind the corporation, it becomes unnecessary to rule upon respondent's plea of estoppel.
4. The ultimate question to be determined in deciding this issue is the amount of the gain realized by Magothy upon the liquidation of the Symington Corporation in 1925. However, the parties have narrowed the issue to the question of the cost to Magothy of its 10,000 shares in the Symington Corporation. They have stipulated the book and fair market values of the assets of the Symington Corporation which Magothy received in the liquidation. The facts pertaining to the issue are set forth in paragraphs (10), (12), (17), (19), (21) to (24), (29) *917 to (33), and (65) to (67) of our findings.
The respondent determined the cost of the said shares was $290,346.19. The petitioner contends that the respondent's figure of cost should be increased by $939,136.80.
(a) On November 25, 1924, Charles J. and Donald Symington agreed to purchase all of the assets and business of the Delaware company, paying therefor $5,000,000 in cash and assuming all of the outstanding liabilities of that company. On December 2, 1924, Donald Symington organized the Magothy Corporation. On December 5, 1924, the two Symingtons agreed to a division of their rights under the purchase contract of November 25, 1924. Under that agreement, Donald Symington was given the right to purchase certain of the assets of the Delaware company in consideration of his assuming all of that company's liabilities not expressly assumed by Charles J. Symington. On December 12, 1924, Donald Symington turned over to Magothy all of his rights to purchase the assets of the Delaware company, as defined and limited by the two agreements of November 25 and December 5, 1924, the sole consideration being that Magothy would assume all of Donald Symington's liabilities under those*918 agreements. On December 15, 1924, the Symingtons referred to in paragraphs (14) and (26) of the findings agreed among themselves, in writing, to exchange their 30,000 shares in the Delaware company for 30,000 shares in Magothy. Charles J. and Donald Symington directed the Delaware company to transfer certain of its assets to Magothy, upon payment by the latter of $500,000. It is clear from *744 the record, as a whole, that in all of the foregoing transactions Donald Symington was acting for and on behalf of the Symingtons, who agreed to exchange their shares in the Delaware company for shares in Magothy. The transfer of the Delaware company's assets and payment therefor were effected on December 17, 1924. On January 7, 1925, the Symingtons exchanged their 30,000 shares in the Delaware company for 30,000 shares in Magothy, on a share for share basis. No other shares were ever issued by Magothy. Among the assets transferred by the Delaware company to Magothy were the 10,000 shares in the Symington Corporation in question. Those shares were carried on the books of the Delaware company and entered on the books of Magothy at a figure of $1,000. Based upon asset and liability*919 values on the books of the Delaware company, the total consideration paid by Magothy exceeded the assets by $260,286.90. The respondent found the excess to be $290,346.19, but that included asset and liability items that did not appear on the Delaware company's books, and he ascribed the whole amount of it as the cost of the aforesaid shares in the Symington Corporation. On March 1, 1925, the Symington Corporation was dissolved and, in the liquidation of the latter, Magothy received total assets of the fair market value of $1,622,057.36. At that time, the Symington Corporation owed Magothy $353,750 on account of loans and interest. The respondent determined a gain of $977,961.17 to Magothy upon the liquidation of the Symington Corporation. There was little or no change in the fair market value of the assets of the Symington Corporation between December 12, 1924, when Donald Symington assigned his rights to purchase assets of the Delaware company to Magothy, and March 1, 1925, when the Symington Corporation was dissolved.
From the foregoing facts it is obvious that the rights assigned and transferred to Magothy by Donald Symington had a very substantial value as of the date*920 of the transfer. Because of that assignment and transfer, which included the right to purchase the 10,000 shares in the Symington Corporation, Magothy, upon the liquidation of the Symington Corporation some two and a half months later, came into possession of assets having a fair market value of $1,622,057.36. The only indebtedness standing against those assets was the Symington Corporation's indebtedness of $353,750 to Magothy. If the net of these two figures, $1,268,307.36, be substituted for the Delaware company's book figure of $1,000 for the Symington Corporation's shares, the value of the Delaware company's assets acquired by Magothy would exceed the consideration paid, even upon the basis of respondent's adjustment, by $977,961.17. And this excess was real, because it was actually realized in the liquidation of the acquired assets. Donald Symington testified that *745 the purchase rights turned over to Magothy had a fair market value, as of the date of transfer, of $900,000. We think the facts of record support that opinion, and we have made an ultimate finding in accordance therewith.
The petitioner contends that these purchase rights represent a paid in surplus*921 to Magothy of $900,000; that the rights were dissipated by the purchase of the Delaware company's assets and their cost of $900,000 was merged with and became a part of the cost of those assets; and that the whole cost of the rights is ascribable as cost of the shares in the Symington Corporation.
Assuming, but not deciding, that the petitioner's contentions are correct, still, as we interpret the governing statutory provisions, the value of the purchase rights may not be included in the basis of the shares for computing the gain to Magothy upon liquidation of the Symington Corporation. Sections 204(a)(2) and (8) and 203(b)(4) of the Revenue Act of 1924 2 are controlling. Donald Symington and his associates acquired the rights to purchase the Delaware company's assets by contract directly made with that company and without any cost to them. Those rights had no basis in their hands. They conveyed those rights to Magothy, all of whose outstanding shares they owned, for the sole consideration that Magothy assume all liabilities in respect of those rights. As they exchanged their shares in the Delaware company for shares in Magothy on a share for share basis, it is clear that, *922 as between themselves, their proportional interests in the assets of the Delaware company were preserved *746 and maintained after those assets were transferred to Magothy. In that situation it was obviously unnecessary for Magothy to issue additional shares in payment for the purchase rights. Had Magothy done so, it would not have changed the proportional interests of the shareholders, and the value of their shares, irrespective of the number held, would have remained the same. However, had Magothy issued shares in payment for the said purchase rights, the transaction unquestionably would have fallen within the provisions of subdivision (a)(8) of section 204, and the basis of the purchase rights in the hands of Magothy would have been the basis thereof to the transferors, which was nil. We think the acquisition by Magothy of the purchase rights is, considering all of the surrounding circumstances thereof, within the intendment and spirit of subdivision (a)(8), and that the basis there prescribed is the basis applicable to those rights in the hands of that corporation. In that view we are supported by the decisions in *923 ; affd., .
*924 Cf. ; certiorari denied, . On this phase of the issue the Commissioner is sustained.
(b) The petitioner contends that in any event there should be added to the cost of $290,346.19 for the Symington Corporation's shares, determined by the Commissioner, the sums of $36,957.50, made up of the items set forth in paragraphs (65) and (66) of our findings, and $2,179.30, allegedly expended for revenue stamps and title fee in connection with Magothy's acquisition of the Delaware company's assets, a total of $39,136.80.
Under the several agreements which made up the so-called plan of reorganization of the Delaware company, the Maryland company assumed all of the current liabilities of that company and was to have sufficient of its current assets to exceed those liabilities by $1,500,000. Magothy was to have the remaining current assets. Upon the basis of figures on the Delaware company's books, the current assets transferred by that company to the Maryland company exceeded the current liabilities, likewise transferred, by $511,206.78 more than $1,500,000. For this excess*925 the Delaware company set up an account receivable on its books against the Maryland company. This account receivable was among the remaining assets transferred to Magothy. Thereafter, there was an account stated and settlement between the Maryland company and Magothy, which took into account current assets and liabilities which did not appear on the Delaware company's books. After that settlement, the Maryland company expended the items set forth in paragraph (65) of the findings and called upon Magothy for reimbursement, and it *747 was so reimbursed, for those items. The item set forth in paragraph (66) of the findings was expended directly by Magothy.
The petitioner says, without regard to the nature of the items, that the effect of the aforesaid reimbursement and expenditure was to reduce the value of the assets which Magothy received from the Delaware company, without any corresponding decrease in the consideration which it agreed to and did pay for those assets, so that the remaining assets represent an increased cost of $39,136.80, all of which is ascribable to the Symington Corporation's shares. We agree with this treatment of the matter, but only to the extent*926 that the reimbursement and expenditure are related to actual liabilities of the Delaware and Maryland companies and not to organization expenses of Magothy.
As to the item of $2,179.30 alleged to have been expended for revenue stamps and title fee in connection with Magothy's acquisition of the Delaware company's assets, there is no evidence. The record does not even show that the expenditure was made. The one witness who testified as to all of the items involved stated that he knew nothing about this alleged expenditure. It is disallowed as additional cost of the acquired assets.
The items set forth in subparagraphs (a), (c), (d), and (e) of paragraph (65) and the item set forth in paragraph (66), which represent a total of $24,218.51, upon the facts stated are clearly not related to organization expenses of Magothy. That total figure is allowed as additional cost of the acquired assets.
At to the item of $12,739.08 set forth in subparagraph (b) of paragraph (65), only $1,901.53 may be allowed as additional cost of the acquired assets. Of the remainder, $837.55 is clearly an organization expense of Magothy, and $10,000, which represents organization expenses of both*927 the Maryland company and Magothy, can not be segregated between the two, because of lack of evidence as to a proper basis upon which to make the segregation.
In view of the foregoing, we hold that the cost to Magothy of the 10,000 preferred shares in the Symington Corporation which it acquired from the Delaware company was $316,466.23, and, accordingly, that the gain to Magothy in 1925 upon the liquidation of the Symington Corporation was $951,841.13, instead of $977,961.17 as determined by the respondent.
5. The issue here is whether or not Magothy sustained a deductible loss in 1925 upon the liquidation of 30,000 common shares in the Delaware company, which it owned, and the amount of that loss, if any. The specific facts pertaining to the issue are set forth in paragraphs (5) to (9), (14), and (26) to (28) of our findings, but all of the facts contained within paragraphs (5) to (29), inclusive, *748 are applicable in a general way. The Revenue Act of 1926 governs the issue, and the controlling provisions thereof are embraced within sections 201(c), 202(a) and (d), 203(b)(4), and 204(a)(4), and (8). 3
*928 The shares in question are the 30,000 acquired by Magothy from Donald Symington and his associates in exchange for 30,000 of its own shares, as set forth in paragraphs (14) and (26) of the findings. Immediately after the exchange Donald Symington and his associates were in control of Magothy, since they owned all of its outstanding shares. If then, the exchange of shares for shares was bona fide and valid and is to be thus recognized, as petitioner contends and the respondent denies, the transaction is within the provisions of section 203(b)(4) and, under the provisions of section 204(a)(8), the basis of the shares in the hands of Magothy, for the purpose of computing gain or loss upon the liquidation of those shares, is the same as it would be in the hands of the transferors. Both parties concede that the exchange of 30,000 shares of stock of the Delaware company by Donald Symington and his associates for 30,000 shares of stock of Magothy was not a reorganization within the meaning *749 of section 203(h) of the 1926 Act, and therefore does not come within section 203(b)(3) of the 1926 Act.
With respect to respondent's contention that we should not treat the transfer*929 by Donald Symington and his associates of 30,000 shares of the Delaware company in exchange for 30,000 shares of Magothy as coming within the provisions of section 203(b)(4), but should rather treat it as if they had first redeemed their stock at $50 per share cash and then used the money to purchase each share of Magothy at $50 per share, we think it can not be sustained. The transaction was not handled in that way. Donald Symington and his associates actually transferred the 30,000 shares of stock in question to Magothy in exchange for 30,000 of its shares. Thereupon Magothy turned in the several certificates aggregating these 30,000 shares to the Delaware company and it issued a new certificate for 30,000 shares to Magothy. Early in 1925 Magothy turned in these shares for redemption and received $1,500,000 in cash therefor out of the funds which had been previously deposited at the Chase National Bank. We find nothing unreal in the transaction. Magothy was not organized merely for the purpose of liquidating these 30,000 shares and then dissolving. Far from it. It had numerous business transactions out of some of which respondent has determined large profits. For example, *930 there is the disposal by sale of the 81,000 shares of National Steel Corporation stock which it acquired in the liquidation of the Symington Corporation. Magothy itself was not dissolved until 1928 and its dissolution had no connection with the redemption of the 30,000 shares of the Delaware company stock here in question, which took place early in 1925.
We find no merit in respondent's contention that we should disregard what was done and treat the transaction as if something else had been done. We overrule respondent's contention in that respect.
For convenience in the consideration of the gain or loss realized, the 30,000 shares are divided into two blocks: One block of 22,000, consisting of the shares acquired from T. H., Donald, John F., and Elsie J. Symington; the other of 8,000, consisting of the shares acquired from Emily H., and Elizabeth L. Symington. The parties have stipulated that the cost basis of the first block of 22,000 shares in the hands of the transferors is $50 per share. There is no longer any issue as to these shares. As to them it is agreed that Magothy had neither gain nor loss upon their liquidation in 1925. As the 8,000 shares in the second block*931 were acquired by the transferors by gift before December 31, 1920, the basis thereof, under the provisions of section 204(a)(4), is the fair market value of the shares at the time acquired.
*750 The petitioner contends that that fair market value was $100 per share. This contention is predicated upon the earnings, book value of assets, stock values returned and adjusted by respondent for capital stock tax purposes, and the opinion evidence of Donald Symington. The Commissioner determined a value of $50 per share at the basic date and contends that the evidence does not overcome the correctness of his determination. The evidence on this point is quite voluminous, consisting of statements taken from the books showing the annual earnings of the corporation for several years before and after the basic date; the book value of the assets underlying the stock as of December 31, 1920; the value of the capital stock of the corporation as determined by the Commissioner for capital stock purposes; the testimony of Donald Symington, who disclosed his familiarity with the stock and the earning history of the corporation and knowledge of the assets underlying the stock. We do not deem*932 it necessary to discuss this evidence in detail. We have carefully considered it all and from it we have found that the 8,000 shares of stock in question had a fair market value of $80 per share at the time it was acquired by gift, December 15, 1920, by Emily H. and Elizabeth L. Symington.
For reasons which we have already stated, petitioner Magothy Corporation is entitled to use this $80 per share as its basis in determining its gain or loss on the liquidation of these shares of the Delaware company in 1925.
6. In this issue Magothy claims a deduction of $2,630 for 1925, that being the amount of a capital stock tax assessed against it in 1928, after its dissolution, for the capital stock tax period July 1, 1925, to June 30, 1926, which was paid by the Patapsco Corporation, one of the transferees, in liquidation of Magothy. Magothy kept its books and rendered its income tax returns on an accrual basis. The facts pertaining to the issue are set forth in paragraph (62) of our findings.
The respondent contests the right of Magothy to the deduction, on the ground that the tax was paid by another.
It is said that the assessment resulted from the disallowance of Magothy's*933 claim for exemption from the tax. Under the circumstances, the tax should have been accrued and deducted by Magothy in 1925. ; affd., . We have the year 1925 before us and the claimed deduction is allowed to Magothy for that year.
We think it is of no consequence that the tax was eventually paid by the Patapsco Corporation. Liability for the tax accrued in 1925, and there was then no liability on the part of the Patapsco Corporation to pay it. The latter's liability arose in connection with the liquidating distribution to it in 1928 of the assets of Magothy, *751 which is quite another matter and has nothing to do with determining when the tax is deductible to Magothy.
7. The question is whether or not a liquidating dividend of $25,000 received by Magothy from the Lexington Machine Corporation in 1926, and reported in the return for that year, should be reduced by $3,149.86 representing income tax due from the Lexington Machine Corporation and paid by Magothy in 1927. The facts pertaining to the issue are set forth in paragraph (69) of our findings. As to this issue petitioner*934 states in its brief as follows:
* * * The Commissioner was probably correct in disallowing the amount of Federal income taxes accrued against the The Lexington Machine Corporation as a deduction for the year 1927. However, it is clear that if the amount in question does not constitute an allowable deduction for the year 1927, the year in which paid, then it obviously constitutes a reduction of the liquidating dividend received and taxed during the year 1926. The true liquidating dividend was only $21,850.14 instead of $25,000.00. Therefore, petitioners request that this Board determine that taxable income for the year 1926 should be reduced by the amount of $3,149.86, representing Federal income taxes accrued against The Lexington Machine Corporation, and assumed by Magothy Corporation upon the liquidation of the said The Lexington Machine Corporation in October, 1926.
On brief the respondent states: "Should the Board find as a fact that the Magothy Corporation assumed and paid the liability of the Lexington Machine Corporation in the sum of $3,149.86 for Federal income taxes, the respondent offers no objection to reducing the liquidating dividend received by the amount of*935 Federal income taxes so paid."
We have found as a fact that Magothy did pay the tax in question. The liquidating dividend received by Magothy in 1926 should accordingly be reduced by $3,149.86.
8. The question presented by this issue is the amount of the loss sustained by Magothy in 1927 upon the sale of certain shares in the Gibson Island Co. to T. H. Symington. The petitioner contends that Magothy sustained a loss of $821,199.47 upon the transaction, measured by the excess of the alleged cost of $971,199.47 over the selling price of $150,000. The respondent contends that the transaction was not a bone fide sale, but contained an element of gift; that the fair value of the shares at the time they were disposed of to T. H. Symington for $150,000 was $729,732.62; and that loss sustained by Magothy in the transaction should be measured by the excess of the cost, which respondent determined to be $923,200, over the said fair value. Upon the respondent's basis, the loss is $193,467.38, which he allowed. The facts pertaining to the issue are set forth in paragraphs (36) to (45), inclusive, of our findings.
(a) We shall first consider the dispute as to the cost of the shares. *936 To the figure of $923,200 determined by the respondent in his *752 deficiency notice to be the cost to petitioner of these shares, the petitioner contends there should be added $47,999.47, this being the amount paid by Magothy to E. H. Bouton in the purchase of his 368 preferred and 368 common shares in the Gibson Island Co., as set forth in paragraph (43) of the findings. The contention is predicated upon the proposition that the sale to T. H. Symington included the shares purchased by Magothy from Bouton. The proposition is denied by the respondent.
It will be noted from the findings that Bouton had thrice within 1927, the last time on November 15, 1927, demanded that the syndicate purchase his shares in the Gibson Island Co. as provided in the agreement of January 1923; that Magothy had taken over the liability of the syndicate under the aforesaid agreement in February 1925, when it acquired its shareholdings in the Gibson Island Co.; that T. H. Symington's offer to purchase Magothy's shares in the Gibson Island Co. was made on December 13, 1927; and that the Bouton shares were purchased by Magothy on January 26, 1928. Therefore, at the times of Symington's offer and*937 the acceptance and approval thereof by the directors and shareholders of Magothy, respectively, the liability of Magothy to purchase the Bouton shares had become fixed and determined and the purchase thereof was pending.
Petitioners offered the testimony of Donald Symington, former president of Magothy, and L. A. Townsend, former secretary and treasurer of Magothy, to prove that when the 9,232 shares of preferred and 17,532 common shares in the Gibson Island Co. were sold to T. H. Symington for $150,000, it was also intended to include the 368 shares of preferred and 368 shares of common formerly owned by Bouton. While we do not question the good faith of these witnesses in so testifying, we are not convinced that their recollection of the transaction is a more accurate record of it than the recorded evidence of the transaction.
The written offer of T. H. Symington, the directors' resolution of acceptance thereof, and the shareholders' resolution approving the directors' action make up the contract under which Magothy disposed of its shares in the Gibson Island Co. to T. H. Symington. There is nothing ambiguous about the contract. It relates to 9,232 preferred and 17,532 common*938 shares in the Gibson Island Co., and petitioners concede that the Bouton shares are not expressly included therein. That concession is supported by the finding that Magothy purchased the Bouton shares at a time subsequent to its contract with T. H. Symington and after delivery under the contract of the shares which it actually then owned. These documents, which are a part of the corporate records, were prepared concurrently with the transaction, and we believe that these documents portray the transaction with *753 greater reliability than does the testimony of the witnesses drawn from memory nine years after the transaction took place. Moreover, there are corroborating facts which indicate, we think, that the entire contract between T. H. Symington and Magothy is embraced within the offer and acceptance. The Bouton shares were never delivered to T. H. Symington. After they were acquired from Bouton, they continued in the ownership and possession of Magothy until that corporation was liquidated on February 2, 1928. Upon liquidation Magothy distributed them on a share for share basis to its two remaining shareholders, the Patapsco Corporation and T. H. Symington & Son, Inc. *939 , between whom all of the outstanding shares of Magothy were owned in equal amounts, the distribution being made under an agreement in which the two shareholders covenanted and agreed with each other to each assume one-half of all of the liabilities of Magothy.
In view of the foregoing, we hold that the Bouton shares were not a part of the sale by Magothy to Symington, and, therefore, that the cost of the said shares may not be considered in computing the loss sustained by Magothy in that transaction. The respondent's determination of a cost figure of $923,200 for the purpose of computing the loss is sustained.
(b) The further question on this issue is whether the disposition by Magothy of its shares in the Gibson Island Co. to T. H. Symington was a bona fide sale, or whether, as the respondent contends, it contained an element of gift.
The respondent determined that the fair value of the shares so disposed of to Symington, for $150,000, was $729,732.62. This determination was reached by an apportionment of the net worth of the Gibson Island Co., as shown by its books, over all of its outstanding shares. That book net worth reflected the actual cost of the assets to the*940 Gibson Island Co., and the respondent's determination does not purport to be based upon the fair market value of the assets as of the time of the transaction in question.
We think that the evidence pertaining to this issue, as a whole, not only overcomes the statutory presumption of correctness of the respondent's determination, but shows that it was an arm's length transaction. The circumstances under which the sale was made to T. H. Symington dissipate the idea that there was an element of gift involved in the transaction. These circumstances are described in the testimony of Donald Symington, who testified at length concerning the transaction. He testified that Magothy, at the time of the transaction, had already invested nearly a million dollars in the Gibson Island Co. That investment dated back to February 1925, when, buttressed by the advice and opinion of an expert who had *754 been engaged to investigate the possibilities of the Gibson Island development, Magothy believed that development could be prosecuted to a profitable conclusion. But the repeated losses in the period of May 1926 to December 1927 disclosed, at least in the minds of the responsible officers*941 of Magothy, the futility of attempting to carry on the venture. Within that period, the capital of the Gibson Island Co. had been encroached upon and impaired, by increasing periodical deficits, to the extent of more than $213,000. The loss in December 1927 alone amounted to approximately $40,000, which, if continued at no greater monthly rate than that, would have wiped out the remaining capital of the Gibson Island Co. within another 18 moths. It was at this point that Donald Symington demanded that the development be stopped and refused to gamble further with the resources of Magothy in that development. This brought about strained relations with T. H. Symington, who was then the president of the Gibson Island Co., and resulted in an offer to T. H. Symington that he could have the shares in the Gibson Island Co. for $150,000. Later events proved that Donald Symington was right in his forecast of the future of the Gibson Island Co., for, as the testimony shows, it turned out to be the "flat failure" that he predicted it would be.
Magothy is entitled to a deduction of $773,200 for 1927, by virtue of having sustained a loss of that much upon the sale of its shares in the Gibson*942 Island Co. to T. H. Symington.
9. This issue is alternative to point (a) of the preceding issue. Here, the petitioner claims that Magothy is entitled to a loss deduction of $47,999.47 for 1927, representing the amount paid to Bouton for his 368 preferred and 368 common shares in the Gibson Island Co. The deduction is claimed on the grounds that Magothy was compelled by contract to purchase Bouton's shares; that said shares had no value either in 1927 or when actually purchased in 1928, with the result that the amount paid to Bouton was irretrievably lost; and that the contract obligation to purchase the shares became a fixed and determined liability of Magothy in 1927. An alternative claim is that Magothy is entitled to a deduction of $42,019.47 for 1927, representing the excess of the amount paid to Bouton for the shares over the alleged fair market value of the shares when purchased.
Petitioner's contention must be denied. It is clear that Magothy's purchase of Bouton's stock was a capital transaction and the stock was not worthless either at the time of purchase or at the end of the year.
It is true that the stock had greatly depreciated in value and was not nearly*943 worth the price which Magothy had to pay for it under the agreement which it had taken over from Donald Symington *755 and his associates. The transaction nevertheless remained a purchase and petitioner is not entitled to take a loss until the stock was disposed of in a transaction where gain or loss is recognized. , affirming the . Petitioner's alternative contention is not sustained.
10, 11, 12, and 13. These issue involve the question of what is the basis to each of Emily H., Elizabeth L., and Elsie J. Symington, and T. H. Symington & Son, Inc., without regard to the distributions discussed hereinafter in issue 14 of their shares in Magothy, which they disposed of in 1928. The respondent fixed the basis as to all four at $50 per share. The petitioner concedes, on the reply brief, that the respondent's basis is correct as to Elsie J. Symington and T. H. Symington & Son, Inc. As to the basis of the shares of Emily H. and Elizabeth L. Symington, the petitioners contend the correct basis is $100 per share, this being a logical sequence to their contentions in connection with*944 issue 5 - that the fair market value of the shares in the Delaware company which they acquired by gift in 1920 and exchanged for their shares in the Magothy Corporation in 1925 was $100 per share at the time so acquired. The issue is governed by sections 112(b)(5) and 113(a)(6) of the Revenue Act of 1928, which are identical in meaning with sections 203(b)(4) and 204(a)(6) of the Revenue Act of 1926.
In the decision of issue 5 we held that the basis of each of these two petitioners' shares in the Delaware company was $80 per share. If the exchanges of their shares in the Delaware company for shares in the Magothy Corporation in 1925 were nontaxable exchanges within the provisions of section 203(b)(4) of the Revenue Act of 1926, as petitioners contend, they are likewise within the provisions of section 112(b)(5) of the Revenue Act of 1928, and therefore the bases of their shares in Magothy are, under section 113(a)(6) of the 1928 Act, the same as the bases of the exchanged shares in the Delaware company - that is, $80 per share. Redetermination of the deficiencies will be made accordingly.
14. The question here is whether or not the distributions of $10 per share and $20 per*945 share paid by Magothy on December 20, 1927, and January 9, 1928, respectively, were distributions in liquidation, which are to be applied against and reduce the bases to the distributees, of their shares in the said corporation, for the purpose of computing gain or loss upon the disposition of those shares in 1928. The respondent treated them as distributions in liquidation and, accordingly, reduced the distributees' basis of their shares in Magothy; but the petitioners contend that the distributions were ordinary dividends paid in the regular course of business and without any thought of liquidating the corporation. Our decision is that the dividend distribution of $10 made December 20, 1927, was an ordinary dividend *756 and not a liquidating dividend, but that the dividend of $20 per share made January 9, 1928, was a liquidating dividend made in pursuance of a plan for the complete liquidation of Magothy. Determination of the deficiencies will be made accordingly.
15. Here the petitioner charges the respondent with error in holding that there was distributed to T. H. Symington & Son, Inc., in 1928, in liquidation of Magothy, one-half of the Bouton shares (184 preferred*946 and 184 common shares in the Gibson Island Co.), discussed in subdivision (a) of issue 8 and in issue 9, and in including the alleged fair value thereof, $18,400 in the payment received by T. H. Symington & Son, Inc., for its shares in Magothy for the purpose of computing gain or loss upon the liquidation of said shares in Magothy. The petitioner contends that the Bouton shares were sold to T. H. Symington in 1927 and were not among the assets distributed to the two remaining shareholders in the liquidation of Magothy.
In our decision under subdivision (a) of issue 8, we held that the Bouton shares were not a part of the shares in the Gibson Island Co. which Magothy sold to T. H. Symington in 1927.
The facts set forth in paragraph (63) of the findings show conclusively that one-half of the Bouton shares were distributed to T. H. Symington & Son, Inc., in 1928 in liquidation of the latter's shares in Magothy. On this issue the respondent's action is sustained.
16. The question here is the fair market value of the 184 preferred and 184 common shares in the Gibson Island Co., which T. H. Symington & Son, Inc., received in liquidation of its shares in Magothy, as of the date*947 of the distribution, February 2, 1928. The respondent determined that value to be $100 per share for the preferred and nothing for the common, a total of $18,400. The petitioner contends that the correct fair market value is $16.25 per share for the preferred and nothing for the common.
We think that the best evidence that the record affords as to the fair market value of these shares is the sale by Magothy of 9,232 preferred and 17,532 common shares in the Gibson Island Co. to T. H. Symington in 1927 for $150,000. We have held in our decision under subdivision (a) of issue 8 that that was a bona fide sale made at arm's length. The parties are in an apparent agreement that the price paid by Symington in that transaction related entirely to the preferred shares. It seems clear from the evidence that the common stock of the Gibson Island Co. had no fair market value. Our conclusion is that the fair market value of the shares under consideration, as of the date distributed to T. H. Symington & Son, Inc., in liquidation, was $2,990. The respondent's determination is modified accordingly.
*757 17. The question presented by this issue is whether or not certain liabilities*948 of Magothy which were unpaid at the time of the liquidation of that corporation should be taken into consideration in computing the gain or loss to T. H. Symington & Son, Inc., resulting from the liquidation of its shares in Magothy. The particular liabilities involved are the capital stock tax of $2,630 for the period July 1, 1925 to June 30, 1926, discussed in issue 6, and such additional income taxes, penalty, and interest as may be found to be due from Magothy under the Board's decision in the present proceedings. The respondent did not take either of these liabilities into consideration in computing the gain or loss. The petitioner contends that he should have done so, for the reason that T. H. Symington & Son, Inc., bore one-half the capital stock tax of $2,630 mentioned above and will bear one-half of any taxes, penalties and interest determined against Magothy in these proceedings. Manifestly the Government is not entitled to collect from the petitioner, T. H. Symington & Son, Inc., capital stock taxes and additional income taxes, penalty, and interest of Magothy, as transferee of Magothy, and then charge the entire amount received by T. H. Symington & Son, Inc., in liquidation*949 of Magothy as income without reduction for such taxes paid or assumed to be paid by it. Cf. ; ; ; ; ; ; . On this issue we hold for petitioner.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. Dec. 2 to Dec. 31, 1924. ↩
2. SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(2) If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner;
* * *
(8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
SEC. 203. (b)(4) 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. ↩
3. SEC. 201. (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. In case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
SEC. 202. (a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized.
* * *
(d) In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purposes of this title, shall be determined under the provisions of section 203.
SEC. 203. (b) (4) Identical with the same section of the Revenue Act of 1924 previously quoted in footnote No. 2, supra. )
SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(4) If the property was acquired by gift or transfer in trust on or before December 31 1920, the basis shall be the fair market value of such property at the time of such acquisition.
* * *
(8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. ↩