*1972 1. Petitioner was organized in 1914 for the purpose of acquiring certain bonds owned by another corporation and in that year it issued its entire stock, except qualifying shares, in exchange for such bonds. Held, that the basis for determining gain or loss from subsequent sales of the bonds, under the Revenue Act of 1926, was cost to the petitioner, i.e., the value of the stock measured by the stipulated value of the bonds received therefor.
2. The petitioner is not entitled to use the basis of the previous owner of the bonds under section 204(a)(6), for the transaction of 1914 is, by the express terms of the last sentence of that section, excluded from its operation.
3. Quaere: Whether the provisions of section 203(b) of the Revenue Act of 1926, excepting certain classes of transactions from recognition of gain or loss, are applicable to transactions occurring prior to that act.
*1287 Respondent determined deficiencies of $6,347.95, $156.27, and $2,165.67, in petitioner's income taxes for 1925, 1926, and 1927, respectively. In determining*1973 said deficiencies he has computed profit from sales of securities, acquired by petitioner in exchange for its stock, on the basis of their cost to it. Petitioner contends that the proper basis is cost to the prior holder. Other issues have been settled. This case was submitted upon the following stipulation of facts:
STIPULATION OF FACTS.
1. That the petitioner corporation was incorporated on February 5, 1914, under the laws of the State of Delaware, with 20,000 shares of capital stock having a par value of $5 each. The organizers of the petitioner corporation *1288 were the individuals in control of The Bloch Brothers Tobacco Company, a corporation existing under the laws of West Virginia. The petitioner corporation was created for the specific purpose of taking over a large amount of bonds which had been accumulated by The Bloch Brothers Tobacco Company over a period of years, which bonds were those of various industrial concerns, public utilities and foreign governments.
2. That on February 5, 1914, The Bloch Brothers Tobacco Company delivered bonds having a face value of $1,212,051 to the petitioner corporation in exchange for 19,985 shares of petitioner corporation's*1974 stock. The remaining 15 shares of petitioner's capital stock were issued 3 shares each to five individuals who became the Board of Directors. These 15 shares were paid for at $5 per share.
3. That among the securities transferred to the petitioner corporation on February 5, 1914 were bonds of the Chicago, Rock Island and Pacific Railway Company with a face value of $50,000. These bonds had been purchased by The Bloch Bros. Tobacco Company in 1904 and 1906 for $40,750. During 1915 the Chicago, Rock Island and Pacific Railway Company experienced financial difficulties, which resulted in a sharp decline in the market value of its outstanding bonds and stock. The Chicago, Rock Island and Pacific Railway Company placed a certain amount of its stock in the hands of trustees to secure the aforementioned bonds. On October 22, 1915, the Chicago, Rock Island and Pacific Railway Company canceled the aforementioned bonds and the stock which had been placed with trustees as collateral was delivered. The petitioner corporation thereby acquired 500 shares of stock of the Chicago, Rock Island and Pacific Railway Company on October 22, 1915.
4. That on January 1, 1925, the petitioner*1975 still held a large portion of the bonds that it had acquired upon incorporation on February 5, 1914. It also held the above-mentioned 500 shares of stock of the Chicago, Rock Island and Pacific Railway Company. In addition to the 500 shares of stock referred to above, the petitioner corporation acquired during 1915, 10 additional shares, at a cost of $104.20. During 1925, the petitioner corporation sold a part of its bond holdings, and 510 shares of stock of Chicago, Rock Island and Pacific Railway Company.
5. That the respondent has computed a deficiency for the year 1925 on the theory that the basis to be used in computing the profit on the sale of bonds was their fair market value on February 5, 1914, and that the basis to be used in computing the profit on the sale of the stock, was its fair market value on October 22, 1915, the date on which it was delivered to the petitioner corporation. Whereas, the petitioner contends that it sustained a loss on the bonds sold, based upon the cost to The Bloch Brothers Tobacco Company prior to March 1, 1913, and the selling price thereof, and that the basis to be used in computing the loss on the sale of Chicago, Rock Island and Pacific*1976 Railway Company stock, is the cost prior to March 1, 1913, to The Bloch Brothers Tobacco Company of the bonds exchanged for stock, plus the cost of the shares purchased in 1915, and the selling price thereof.
6. That the petitioner corporation in 1926 sold some more of its bonds, which it had acquired on February 5, 1914. The respondent has determined a profit on this transaction, based upon the fair market value of these bonds on February 5, 1914; whereas, the petitioner contends that it sustained a loss based upon the cost to The Bloch Brothers Tobacco Company prior to March 1, 1913, and the selling price thereof.
7. That during the year 1927, the petitioner corporation sold another portion of its bonds, which it had acquired from The Bloch Brothers Tobacco *1289 Company on February 5, 1914. The respondent determined a deficiency based upon a profit resulting from the difference between the selling price and the fair market value on February 5, 1914; whereas, the petitioner contends it sustained a loss, based upon the difference between the cost of such bonds to The Bloch Brothers Tobacco Company prior to March 1, 1913, and the selling price thereof.
8. That*1977 during the year 1927, the petitioner amended its charter and sold additional shares of its stock, and claimed a deduction of $49.50, which amount was disallowed by the respondent. It is stipulated and agreed that of the above amount the sum of $12.50, expended for revenue stamps, represents an allowable deduction; whereas, the amount of $37, attorney's fees in connection with the charter amendment, was properly disallowed inasmuch as this amount represents a capital expenditure.
9. It is further stipulated and agreed that the selling price, fair market value of bonds sold during the respective years 1925, 1926 and 1927, as of February 5, 1914, fair market value of stock as of October 22, 1915, and the cost of bonds to The Bloch Brothers Tobacco Company prior to March 1, 1913, are correctly stated in the following table:
| 1925 | ||
| Selling price - Bonds | $344,496.38 | |
| Fair market value 2/5/14 - Bonds | 386,340.00 | |
| Cost prior to 1913 to The Bloch Brothers Tobacco Co | 433,185.75 | |
| Selling price - Stock | 34,871.85 | |
| Fair market value 10/22/15 - Stock | 10,000.00 | |
| Cost prior to 1913 to The Bloch Brothers Tobacco Co. based on cost of bonds which were defaulted at time stock was issued to petitioner on 10/22/15 | $40,750.00 | |
| Cost of stock purchased in 1915 | 104.20 | |
| 40,854.20 | ||
| Fair market value 2/5/14 of above Bonds | 44,250.00 | |
| 1926 | ||
| Selling price - Bonds | $20,560.00 | |
| Fair market value 2/5/14 - Bonds | 20,200.00 | |
| Cost prior to 1913 to The Bloch Brothers Tobacco Co | 21,357.50 | |
| 1927 | ||
| Selling price - Bonds | $116,656.75 | |
| Fair market value 2/5/14 - Bonds | 110,485.00 | |
| Cost prior to 1913 to The Bloch Brothers Tobacco Co | 126,452.72 |
*1978 OPINION.
STERNHAGEN: 1. The petitioner in 1925, 1926 and 1927, sold property which it had in 1914 acquired in exchange for all its stock. The respondent computed the gain from these sales upon the basis of the cost to petitioner in 1914. The cost was taken to be the value of petitioner's stock when issued for the property, and such value was taken as the equivalent of the stipulated value of the property *1290 received. This is the long accepted way of determining such cost. ; . The petitioner assails the use of such cost as the basis, and claims instead that the basis is the higher cost paid by its predecessor owner before March 1, 1913.
The case is controlled by Title II of the Revenue Act of 1926, which, by section 286, is made effective January 1, 1925. Section 204(a) provides that "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 * * *." There are eleven enumerated exceptions, but, as we shall see, there is none applicable to the present*1979 situation.
Petitioner, however, relies on section 203(b)(3), from which it argues that the transaction in 1914 was a reorganization, the gain or loss of which was not recognized, and that therefore the basis is carried back to that of the preceding owner. But section 203 deals with current transactions within the scope of its effect, and classifies them with reference to the recognition of gain or loss. As to such transactions, the entire gain or loss is recognized unless specifically dealt with by express exception. There is no exception in respect of property sold for cash; therefore the gain or loss is recognized, and the only question is as to the basis. The basis is provided in section 204, and the only possible excepting paragraph of that section which is within the field of consideration is paragraph (6). But that paragraph expressly says that it "shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it." So even if we could find that the situation was "described in subdivision (b), (d), (e) or (f) of section 203," it would be, by express exception, *1980 excluded from the operation of section 204(a)(6), and therefore would take the general basis of cost to this petitioner.
But because we have considered petitioner's argument on its own terms, it is not to be assumed that we have adopted its postulates. For it may at least be doubted, as in , whether the descriptions and definitions of section 203 are, in the absence of express statement, applicable to transactions occurring in 1914 and 1915, involving tax consideration under the Act of 1913, different from those subsequently in force. .
2. What we have said is of equal effect in respect of the shares of stock received in 1915 in exchange for some of the bonds and sold in 1925. The basis is the value of the shares when acquired in 1915. The actual cost of $104.20 of the additional 10 shares is the basis as to them.
Judgment will be entered under Rule 50.