*4212 1. Where property and cash are turned into a new corporation by individuals in exchange for that corporation's stock, the transaction is one which may give rise to gain or loss, and is subject to the provisions of section 202 of the Revenue Act of 1918.
2. In the absence of sales or quoted prices of stock, the market value of the stock may be determined by ascertaining the value of the assets for which it was issued.
3. Upon the evidence, the fair market value of stock determined.
*11 These proceedings, duly consolidated for hearing and disposition, involve deficiencies in income taxes for the year 1919, as follows:
| George A. Ricker | $ 2,547.68 |
| Theodore W. Little | 4,062.90 |
| William P. F. Ayer | 4,431.68 |
The facts giving rise to the deficiencies in question and the issues involved are the same in the instance of each petitioner. A portion of the facts are stipulated. The issues are:
(1) Whether the transaction, involving the transfer of certain property and cash to a new corporation in exchange*4213 for the capital stock of the new corporation, is one from which a gain or loss may arise.
(2) In the event of an affirmative holding on the first point, what was the fair market value of the shares of stock when received by petitioners, July 1, 1919?
*12 FINDINGS OF FACT.
The three petitioners and two associates, sharing equally, acquired on July 1, 1919, the business and assets of the Gauld Company, a corporation dealing at wholesale in plumbing, heating, and mill supplies at Portland, Oreg. The assets so acquired and the amounts paid therefor were, inventory, $111,901.53; equipment, approximately $5,000; good will, approximately $500, or a total purchase price of approximately $117,401.53. The inventory was purchased at an amount approximately 40 per cent below going jobbers' prices as of July 1, 1919.
On or about July 1, 1919, after the purchase of these assets by the five associates, a new corporation was formed, known as the Gauld Supply Co., and its total capital stock, to the extent of 2,250 shares, was issued, with a par value of $100 per share, to the five associates, each sharing equally, in exchange for the property and $25,000 in cash contributed by*4214 them in equal proportions. The cost to the associates of the property, plus the cash of $25,000 so turned in to the corporation, was equivalent to $63.28 per share of the new corporation's stock. The inventory was set up on the corporate books for invested capital purposes at approximately $189,000.
The Gauld Company was originally built up and carried on by two Gauld brothers, both of whom died sometime prior to 1919, their interests descending to their legatees. Friction arose between the legatee owners and the managing officers, with the result that the business in 1918 and a part of 1919 showed a steady decline. The owners made unsuccessful efforts to sell the business for some 18 months prior to its purchase by the five associates in 1919.
The three petitioners and two associates were all connected with the Walworth Manufacturing Co., of Boston, Mass. This corporation, which also dealt in plumbing supplies, maintained a branch house in Portland, Oreg., and was a competitor of the Gauld Company. The Walworth Manufacturing Co., desiring to acquire the business of the Gauld Company, but not having adequate resources to make the purchase, arranged in 1919, through an informal*4215 understanding between the five associates and the Walworth Manufacturing Co., that the five associates should acquire the business and assets of the Gauld Company at Portland, Oreg., for the purpose of turning it over to the Walworth Manufacturing Co. if, and when, that company should decide that its financial position and other conditions warranted such action.
The Gauld Supply Co., from its formation about July 1, 1919, until some time in 1922, was operated by the five associates. On December 30, 1920, a formal written contract was entered into to sell *13 the stock to Walworth Manufacturing Co. at approximately $91 per share. This contract price was later modified and the stockholdings of the five associates in the Gauld Supply Co. were taken over by the Walworth Manufacturing Co. in 1922, at an agreed price of approximately $81.79 per share. The business prospects and financial condition of the company had much improved during operation by petitioners.
No part of the stock of the Gauld Supply Co. was sold or subscribed for by others than the petitioners and their two associates. The stock was at no time in the year 1919 listed on any stock exchange or in any manner*4216 otherwise offered for public sale.
The fair market value of the stock at the time of receipt by petitioners, July 1, 1919, was $63.28 per share.
OPINION.
VAN FOSSAN: That the transaction of July 1, 1919, whereby petitioners and two associates paid in to the corporation property costing $117,401.53 and $25,000 in cash in exchange for 2,250 shares of stock, having a nominal par of $100 per share, is one which may give rise to a gain or loss under section 202 of the Revenue Act of 1918, was established by the decision of the Board in .
It is also well established that in determining the fair market value of stock, reference may be had to the value of the corporate assets, as well as all other pertinent facts. ; .
The evidence in the case, however, does not, in our opinion, show that the assets had any latent value at the time of issuance of the stock in addition to the price paid therefor. Their cost was $117,401.53, to which was added a contribution of $25,000 in cash, giving the stock*4217 a value of $63.28 per share. Though the sale was of a business that was going down hill, it is the best evidence we have of the value of the assets thereby acquired. The fact that two years and a half later a sale of the stock was made at $81.79 per share must be considered and judged in the light of the further facts that in the meantime general conditions had much improved and, under petitioners' management, the company's business had increased. It is our opinion, after a full consideration of all the evidence, that the stock, when received by the petitioner, had a fair market value of $63.28 per share.
Judgment will be entered on 15 days' notice, under Rule 50.