*2095 Certain individuals purchased the assets of a corporation for $100,000, which they transferred to the petitioner for its entire capital stock, par value of $100,000. The petitioner realized during the period in controversy an amount in excess of $100,000, and the respondent seeks to include said excess in its taxable income. Held, the value element at the date of the exchange of assets for capital stock of the petitioner was vital and for failure to offer proof thereof the respondent's determination must be sustained. Further held that the individuals who transferred assets to the petitioner in exchange for its stock were in control of petitioner immediately after said exchange within the meaning of section 203(b)(4) of the Revenue Act of 1924, and therefore the basis for determining gain or loss on the subsequent sale of said assets is that prescribed in section 204(a)(8) of said Act.
*242 This proceeding is for the redetermination of a deficiency in income tax of $7,295.95 for the fiscal year ended April 30, 1925, and the sole issue presented*2096 is whether the respondent erroneously included $54,399.77 in the gross income of the petitioner for the fiscal year aforesaid described as "Accounts receivable excess over purchase price."
*243 FINDINGS OF FACT.
The petitioner is a corporation, organized and incorporated under the laws of the State of Connecticut on March 14, 1924, with an authorized capitalization of $100,000, represented by 1,000 shares of common stock having a par value of $100 each.
In 1923 the petitioner's predecessor, the National Grain Corporation, became financially involved. An attempt was made to arrange a settlement with its creditors, which was not satisfactory to some of them, and in November, 1923, the corporation was adjudicated in bankruptcy, whereupon a receiver was duly appointed on November 23, 1923, and a trustee on January 28, 1924.
Prior to the appointment of the trustee in bankruptcy aforesaid, to wit, on December 16, 1923, an agreement was entered into between George Feuer, John A. Hurley, and Samuel Friedberg, reciting that certain creditors of the National Grain Corporation, a corporation organized and existing under the laws of Connecticut, had, on November 23, 1923, filed*2097 an involuntary petition in bankruptcy against said company in the United States District Court for the District of Connecticut; that it was apparent from the antagonistic attitude of said creditors, or some of them, that a certain offer of composition to be made would not be accepted; that it was their desire to assist David Feuer, who had long been connected with the said business, who understood its affairs, and whom they regarded as competent to conduct said business at a profit; that it was their further desire to assist the said David Feuer in the rehabilitation of his personal financial condition, and it was thereupon agreed therein as follows:
IT IS HEREBY AGREED that we will submit an offer to the Trustee in Bankruptcy when qualified not to exceed One Hundred Thousand ($100,000) Dollars, for the assets of every kind, nature and description belonging to the said The National Grain Corporation, with the exception of the interests that said corporation may have in any real estate now standing in its name.
IT IS FURTHER AGREED that we, individually and amongst those whom we can interest in behalf of the said David Feuer, if said offer not to exceed the sum of One Hundred Thousand*2098 ($100,000) Dollars is accepted, will obtain the necessary amount to consummate said purchase not to exceed said sum of One Hundred Thousand ($100,000) Dollars.
IT IS FURTHER AGREED that in the event that said sale is consummated, that we will conduct said business for a reasonable time and under reasonable terms and conditions with the said David Feuer, in order that the said David Feuer may have an opportunity to purchase the same, and during said time, if mutually agreeable, we will employ the said David Feuer as General Manager of said business.
IT IS FURTHER AGREED that in order to limit our personal responsibility to the amount of the initial payment or investment, and further in order to expedite the transfer of said business to the said David Feuer in the event that said business is purchased by us, that the business shall be incorporated *244 under the laws of the State of Connecticut in the sum not to exceed One Hundred Thousand ($100,000) Dollars forthwith upon acquisition of said business by us.
An offer of $100,000 having been made for the assets of the bankrupt estate aforesaid, the United States District Court rendered a memorandum decision on March 19, 1924, upon*2099 the referee's recommendation that the trustee's petition to sell the assets at a private sale be granted, and it therein ordered a decree in accordance with said memorandum decision. Thereafter, the said court entered its final order in which it authorized and directed the trustee to execute a bill of sale for the personal property of the bankrupt estate, including all accounts receivable, and exclusive of all cash on hand, except the average daily balances, not to exceed $2,000, upon the payment to him of $100,000. By the terms of said order the court stayed the consummation of the sale until April 8, 1924.
The assets aforesaid were acquired by the said Feuer, Hurley, Friedberg and two other individuals named Benjamin Slade and Oscar Katzick for the payment of $100,000, and they were transferred to the petitioner on May 1, 1924, in consideration of the entire capital stock of the petitioner.
The petitioner opened its books as of May 1, 1924, wich capital of $100,000 and a net opening surplus of $50,704.09.
Under date of April 25, 1924, an agreement was entered into between George Feuer, John A. Hurley, Benjamin Slade, Samuel Friedberg, and Oscar Katzick, as the "holders*2100 of the certificates of the Capital Stock of the Federal Grain Corporation," on the one hand, and J. B. Klein, trustee, on the other, which provided:
That each of the undersigned holders of the Certificates of the Capital Stock of the Federal Grain Corporation, shall deposit the same, after being properly transferred on the books of the Company, to J. B. Klein of the City of Bridgeport, County of Fairfield and State of Connecticut, as Trustee, and duly assigned by them in blank, agrees for himself and not for the others, but to and with the others, and the said J. B. Klein, Trustee, as follows:
1. The said shares of stock shall remain on deposit with the said J. B. Klein, Trustee, for the full period of five (5) years from the date hereof, or until the right to purchase said stock is exercised by the said Jacob B. Klein under the terms and conditions of a certain agreement of even date herewith entered into by the said Jacob B. Klein with all the stockholders of The Federal Grain Corporation, to which reference is hereby made.
2. That during said period, said Trustee shall control the said for the purpose of voting on the same in person, or by proxy, at any annual, special, *2101 or other meeting of the stockholders convened for any purpose whatsoever.
3. The said Trustee shall and is hereby authorized to collect any and all dividend or dividends that may accrue upon said stock, and pay the same over to the depositing certificate holders as they may be properly entitled thereto.
4. The said Trustee shall have the right at any time to appoint The First National Bank of Bridgeport, Connecticut, as successor Trustee under this *245 agreement, and in the event of the resignation, or refusal or inability to act of the said J. B. Klein, the said The First National Bank shall be the successor Trustee, and the said successor Trustee shall have all the power hereunder.
5. The said J. B. Klein, Trustee, or his successor Trustee, shall be and remain the agent for the transfer of the capital stock of The Federal Grain Corporation, until the expiration of the trust hereby created.
6. This agreement shall be binding upon our heirs, executors and administrators, and assigns.
IN WITNESS WHEREOF, we have hereunto set our hands and seals at the City of Bridgeport on the twenty-fifth day of April, 1924.
Under date of April 30, 1924, the parties to*2102 the agreement aforesaid entered into a further agreement, agreeing to and with each other, and with Jacob B. Klein, to assign to the said Klein or his assigns, their respective holdings in the stock of the petitioner, upon the payment to them of $105 per share within one year, $110 within two years, $115 within three years, $120 within four years, and $125 within five years, plus all accumulated dividends to the date of said payment, the said Klein to give at least thirty days notice in writing of his intention to exercise his option. The parties to that agreement further agreed, among other things, that the substance of said agreement should "be annexed to and form a part of the certificate of capital stock when issued, so that if said stock is transferred by any of the parties to this contract or by their successors in title, it shall remain subject to the provisions of this agreement." The thirty-day clause was never exercised, nor were the certificates of stock ever assigned in accordance with that agreement.
Voting trust certificates were issued to each of the stockholders depositing their stock with Klein, in accordance with the trust agreement hereinabove referred to, which*2103 provided as follows:
CERTIFICATE OF J. B. KLEIN, TRUSTEE, FOR THE DEPOSIT OF THE STOCK OF THE FEDERAL GRAIN CORPORATION.
I, J. B. Klein of the City of Bridgeport, County of Fairfield and State of Connecticut, having received on deposit certain Certificates of Stock of The Federal Grain Corporation of the par value of One Hundred ($100.00) Dollars each, in trust, under the provisions of an agreement dated the twenty-fifth day of April, 1924, between the holders of Certificates of said Capital Stock and J. B. Klein, Trustee, to which agreement the holder hereof assents by receiving this certificate.
HEREBY CERTIFY that is entitled subject to the provisions of said agreement, to the equitable interest in said deposited shares, without however, the right to vote on any of said shares, which right is exclusively vested in and is to be exercised by the Trustee named in said agreement and his successor.
Upon the termination of the trust upon which the said stock was deposited, the holder hereof will be entitled to receive from the said Trustee, upon surrender of this certificate duly endorsed, a certificate for of the capital stock of said The Federal Grain Corporation, so deposited, *2104 unless said deposited certificates shall have been purchased together with all other certificates *246 by the said Jacob B. Klein under an agreement with all the stockholders for the purchase thereof of even date herewith. The interest in said stock represented by this certificate is assignable only by transfer on the books of the Company kept by the said J. B. Klein, Trustee, for that purpose, by the holder hereof in person or by proxy upon the surrender of this certificate properly assigned.
Dated at Bridgeport, this thirtieth day of April 1924.
(Signed) J. B. KLEIN, Trustee.
The original certificates of capital stock issued by the petitioner were in the names of the subscribers thereto and were dated April 19, 1924. They were, however, not signed and issued until sometime subsequent to the execution of the agreement entered into between the stockholders and Klein, as trustee, dated April 30, 1924.
No individual stockholder ever had actual possession of the certificates of stock during the life of the voting trust agreement except the three qualifying shares issued for the purpose of incorporation. As voting trust certificates were issued each stockholder*2105 endorsed his certificates of stock in blank and received voting trust certificates instead of certificates of stock. All of the original capital stock with exception of the three said qualifying shares was subject to the trust agreement hereinabove referred to.
The capital stock of the petitioner was originally issued to the following persons in the amounts set opposite their names:
| Certificate No. | Name | Number of shares |
| 1 | John A. Hurley | 1 |
| 2 | do | 99 |
| 3 | Benjamin Slade | 1 |
| 4 | do | 199 |
| 5 | Samuel Friedberg | 100 |
| 6 | Oscar S. Katzick | 10 |
| 7 | Jacob B. Klein | 1 |
| 8 | do | 99 |
| 9 | J. B. Klein, trustee | 490 |
| 10 | George Feuer | 290 |
| 11 | J. B. Klein, trustee | 100 |
| 12 | do | 100 |
The certificates numbered 10 to 13, inclusive, represent retransfer of the 490 shares covered by certificate numbered 9, which was originally issued to J. B. Klein, trustee.
The stockholders of the National Grain Corporation were not the same as those of the petitioner.
The petitioner realized during the fiscal year ended April 30, 1925, from the liquidation of accounts receivable and other assets, an amount in excess of $100,000, and the respondent is seeking to include the said excess in*2106 its taxable income for said period.
OPINION.
MORRIS: The petitioner contends that the individuals who acquired the assets of the National Grain Corporation and in turn transferred them to it, and received in exchange therefor an enquitable interest *247 in its capital stock subject to a voting trust for a period of five years and a contract to sell, were not in control of the petitioner immediately after the said exchange within the meaning of section 203(b)(4) of the Revenue Act of 1924.
Section 204 of the Revenue Act of 1924 provides, in so far as applicable here:
(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 -
* * *
(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*2107 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.
Paragraph 4 of subdivision (b) of section 203, referred to in the section of the Act aforesaid, provides:
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.
The petitioner contends further that, since the individuals were not in control within the meaning of section 203, supra, the basis for determining gain or loss upon the realization of accounts receivable is the cost thereof to the petitioner and since its capital stock was equivalent*2108 to the value of accounts receivable and other assets received in exchange therefor, no gain or loss was realized from the said accounts receivable during the fiscal year ended April 30, 1925.
It may be true that the assets when transferred to the petitioner had a fair market value in excess of the par value of the stock paid therefor and it would follow, of course, that the stock had an equal value, irrespective of the par value, but there is no showing in the record just what the value of the property paid in by the transferors at the time transferred was, nor of any enhancement in value while the property was in the hands of the transferors. So that, in so far as the record discloses, the cost of the petitioner is the same as the cost to the transferors, and, therefore, the two bases are the same in amount; consequently, the adoption of either would reach the same mathematical conclusion.
*248 The petitioner has requested us to find as a fact that the value of the capital stock issued in exchange for the accounts receivable was not less than the amount realized therefrom during the twelve months following the exchange, but there is absolutely nothing in the record upon*2109 which to predicate such a finding. The value element at the date of the exchange of assets for capital stock of the petitioner was vital and for failure to offer proof thereof the respondent's determination must be sustained.
While the foregoing satisfactorily disposes of the issue under the pleadings, it is proper, we believe, since the issue was presented and argued almost entirely upon the question of control of the petitioner by the transferors, that we express our views with respect thereto. Section 203(i) of the Revenue Act of 1924 defines the word "control" to mean "the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation." In other words, the term "control" relates to "ownership" and has no bearing upon the actual control over the corporate affairs which a stockholder exercises through his vote; therefore, the fact that the agreement of April 25, 1924, vested the voting rights in the trustee is of little or no improtance.
The mere fact that the certificates of stock were never actually reduced to possession by the individual transferors of the assets begs the*2110 question of ownership. It is not essential that stock certificates be issued at all in order to make one a stockholder. In our opinion, there is no question that the transferors had ownership and control of the petitioner's capital stock for some period of time, even if only momentary, which the petitioner concedes would be sufficient to meet the provisions of the statute. The creation of the trusteeship transferred to Klein the legal title to the shares of stock and the transferors retained their equitable interests. Without already having had complete ownership, therefore, at some time no interest whatsoever could have been transferred to Klein by the transferors. They did have complete legal and equitable ownership within the meaning of the statute, although it may have been for only a short time. But the petitioner contends that the control must be genuine and substantial, and with this we agree. The petitioner further contends that a right bartered away prior to the agreement of the parties is not a genuine and substantial ownership. With this we do not agree. The so-called trusteeship amounted to nothing more nor less than placing the stock in the possession of Klein*2111 with the right to vote and by collateral agreement to purchase it within a period of five years. During the life of the so-called trusteeship the stock remained in the names of the transferors and the dividends accruing thereon were to be collected by Klein and paid over to the certificate *249 holders. In other words, they enjoyed all of the fruits of ownership except possibly the right to possession of the certificate and the right to vote for a period of five years. That, in our opinion did not affect the "control" of the stock within the meaning of the statute.
Judgment will be entered for the respondent.