*1870 1. Petitioner was adjudicated a bankrupt in 1923. Respondent filed with the referee in bankruptcy a claim for taxes for 1921, which claim was paid in full. Petitioner was discharged in bankruptcy in 1924. Thereafter, respondent assessed an additional tax for 1921. Held, that the discharge in bankruptcy does not bar assessment and collection of additional tax, if any, due for the year 1921.
2. Upon the evidence, held that certain stock received by petitioner in exchange for other property had no readily realizable market value and that no taxable gain was derived by petitioner from the transaction.
*522 This is a proceeding for the redetermination of an asserted deficiency in income taxes for the calendar year 1921 in the amount of $5,086.27.
The following errors are alleged in the petition:
(a) The respondent has assessed additional tax against the petitioner for the calendar year 1921, whereas he was barred from making such assessment by reason of the bankruptcy of the petitioner, and by the fact that the respondent had filed*1871 a proof of all claims for income tax due to the Government of the United States by the petitioner with the trustee in bankruptcy prior to the discharge of the petitioner under such bankruptcy, and that such claims had been paid in full.
(b) The respondent has increased the profit realized from the sale or exchange by the petitioner in the year 1921 of his share in certain real estate known as the Wayne Building.
(c) The respondent disallowed as a deduction the sum of $1,950, being the amount of a deduction claimed by the petitioner for the calendar year 1921 for the expenses of operating an automobile used in his business.
On January 22, 1927, an order was entered by a Division of this Board dismissing this proceeding for lack of jurisdiction. By an order dated June 21, 1927, the Division order of dismissal was affirmed by the Board. On November 12, 1927, the petitioner filed in the Court of Appeals of the District of Columbia a petition for review of the decision of the Board on the question of jurisdiction, and on April 9, 1928, that court reversed the decision of this Board and remanded the cause to the Board with directions to reinstate the appeal and redetermine the*1872 deficiency in question.
FINDINGS OF FACT.
The petitioner is an individual residing at Miami, Fla.
Petitioner filed his income-tax return for the calendar year 1921 on April 10, 1922, and showed therein a tax due in the amount of $228.27.
On March 13, 1923, there was filed against petitioner in the United States District Court for the Southern District of Florida, an involuntary petition in bankruptcy and petitioner was adjudicated a bankrupt on April 13, 1923. At this time petitioner had not paid all the income tax shown due on his return for the year 1921. There remained a balance of $114.13. L. Earl Curry, the referee in the bankruptcy proceedings, gave notice to each of petitioner's creditors, in accordance with the rules of the court, of the first meeting of creditors. The Collector of Internal Revenue at Jacksonville was given notice and he filed with the referee a proof *523 of claim in the amount of $161.78. This figure represented the balance of $114.13, tax due under the return filed by the petitioner, and interest in the amount of $47.65. The full amount of the claim was paid to the collector by the referee on April 7, 1924. At the time the case*1873 was closed by the referee's office, all claims that had been filed had been paid in full, and there remained in the hands of the referee $137.25 and 364 shares of stock in the Miami Warehouse Company.
Petitioner was discharged in bankruptcy on March 4, 1924. Sometime thereafter the petitioner's books were examined by a revenue agent and the respondent determined that there was an additional tax due from the petitioner for the calendar year 1921 in the amount of $5,086.27, and in a letter dated January 19, 1926, respondent informed petitioner that this amount had been assessed against petitioner under section 274(d) of the Revenue Act of 1924. In a letter dated September 7, 1926, the respondent informed the petitioner that his claim in abatement would not be received since it was not filed within the time prescribed in section 279 of the Revenue Act of 1924. The amount due from the petitioner was, however, reduced to $4,350.31, by the allowance by the respondent of a credit of $735.96.
In 1921 the petitioner and Benjamin I. Powell, as partners, owned the stock of the Dade Furniture Company, a corporation which was engaged in the retail furniture business in Miami, Fla. The*1874 petitioner and Powell also owned, as partners, real estate in Miami, known as the Wayne Building.
The partnership was dissolved on or about July 5, 1921, and as part of the settlement between petitioner and Powell as to their joint interests petitioner traded Powell his half interest in the Wayne Building in exchange for $10,000 cash and Powell's stock in the Dade Furniture Company. The par value of the stock which petitioner received was $32,000. This gave petitioner the complete ownership of the Dade Furniture Company and its name was changed to the McDonald Furniture Company on January 20, 1922. Petitioner wished to get control of the company and to try to put it on a profitable basis.
At the time of the exchange the Dade Furniture Company was operating at a loss and petitioner could not have sold the stock in the market. At that time the stock had no readily realizable market value.
On November 4, 1922, the Circuit Court of Dade County, Florida, appointed Paul R. Scott receiver of the McDonald Furniture Company, and upon the orders of that court Scott sold all the property of the company and distributed the proceeds. The creditors of the *524 company were paid*1875 approximately 50 per cent of their claims. the taxes due the United States and the State of Florida were paid in full. Nothing was left for the stockholders of the McDonald Furniture Company. One cause of the failing of the McDonald Furniture Company was the sudden depression in the market value of the stock of merchandise on hand.
As appears from the capital-stock-tax return of the McDonald Furniture Company for the year 1923, that company derived net income in the fiscal years ended June 30, 1917, 1918, 1919 and 1920, in the respective amounts of $17,339.49, $8,655.95, $10,061.70 and $3,225.76, and it sustained a net loss in the fiscal year ended June 30, 1921 in the amount of $13,471.54.
In his original return for the calendar year 1921, filed April 10, 1922, the petitioner computed a profit on the transaction whereby he received the stock of the Dade Furniture Company from Powell, as follows:
| Sale of one-half of interest in Wayne Building, Miami, Florida: | |
| Acquired 1920. | |
| Sold to B. I. Powell, Miami, Florida. | |
| Sale Price | $40,000.00 |
| Cost of Property | 10,000.00 |
| Total Profit | $30,000.00 |
| Percentage of profit to sale price | 75% |
| Total collections during 1921 | 10,000.00 |
| Realized profit on same at 75% | $7,500.00 |
*1876 In his amended return for the calendar year 1921 filed October 30, 1925, the petitioner included no income from the transaction in question. Schedule "C" of the amended return showed the following computation and statements:
| Sale of 1/2 share in Wayne Building: | |
| Sale Price | $40,000.00 |
| Cost | 10,000.00 |
| $30,000.00 | |
| Terms of Sale: | |
| Cash | $10,000.00 |
| Stock in the Dade County Furniture Co. of the par value of | 30,000.00 |
| $40,000.00 |
The stock taken in exchange on the sale of the above project had no readily realizable market value, and there is no profit to report. Under the provision of section 202(e) of the Revenue Act of 1921, the cash received is applied against and reduces the basis provided in the above section.
The petitioner filed his petition with the Board on November 3, 1926.
*525 In a letter dated January 19, 1926, addressed to the petitioner, the respondent stated:
The correct profit on sale of your one-half interest in the Wayne Building is $22,800.00 instead of $30,000.00 determined as follows:
| Sale Price | Cash | $10,000 | |
| Book value, 300 shares of stock of the Dade Furniture Company | 22,800 | ||
| $32,800.00 | |||
| Cost | 10,000.00 | ||
| Profit | $22,800.00 |
*1877 OPINION.
MCMAHON: The evidence discloses that the petitioner was adjudicated a bankrupt on April 13, 1923; that the representative of the respondent, the Collector of Internal Revenue at Jacksonville, Fla., filed with the referee in bankruptcy a proof of taxes and interest due for the year 1921 in the amount of $161.78; that the full amount of the claim was paid by the referee on April 7, 1924; that the petitioner was discharged in bankruptcy on March 4, 1924; and that thereafter the respondent determined that an additional tax was due from the petitioner for the year 1921, and assessed an additional tax in the amount of $4,350.31. The first question raised by the petitioner is whether, under these circumstances, the respondent may, under the law, proceed to collect any additional tax for the year 1921.
The Act of Congress of January 7, 1922 (42 Stat. 354), amending the Act of July 1, 1898, as amended by the Acts of February 5, 1903, and March 2, 1917, provides:
SEC. 17. DEBTS NOT AFFECTED BY A DISCHARGE. - A discharge in bankruptcy shall replease a bankrupt from all of his provable debts, except such as (first) are due as a tax levied by the United States, the State, county, *1878 district, or municipality in which he resides; * * *
Despite the above statute, the petitioner contends that the discharge in bankruptcy relieved him from the payment of any additional tax for the year 1921. The petitioner further contends that since the bankruptcy court has jurisdiction to determine the legality of claims of the United States for taxes and the amount of taxes due, and, since, in the instant proceeding, the respondent's claim for taxes for 1921 was approved by the court and paid in full, the whole matter of taxes for 1921 is res judicata.
We consider the decision in , a complete answer, in the negative, to the contention of the petitioner. Therein it was held that where a creditor, after unsuccessfully opposing a composition and a discharge in bankruptcy on the ground *526 of fraud in creating the debt, accepted the dividend and then sued for the balance on the ground that the debt was excepted from the discharge, there was no waiver of the right to sue on the tort by accepting the dividend and that the granting of the discharge was not res judicata of the claim for the balance of the debt. In*1879 the course of its opinion, the court stated in part:
* * * This being the case it is urged that an election and waiver resulted from the act of the debtor in proving his claim as on contract and thus taking advantage of the bankruptcy proceedings and thereby obtaining rights or benefits which he would not have had if he had stayed out and thus saved his right to be freed from the operation of the discharge. But this distinction is also wholly without foundation. Its error lies in assuming that the right which the bankrupt act confers upon enumerated classes of debts to be exempt from the operation of a discharge rests upon the conception that such debts are exempt because they are excluded from the act and may not participate in the distribution of assets. That is to say, the confusion lies in not distinguishing between creditors who are excluded from the bankrupt act and those who although included therein have had conferred upon them the benefit of an exception from the operation of the discharge. Even a superficial analysis of the text of the Bankruptcy Act will make this clear. Thus § 63a and b (30 Stat. 562) enumerates the debts which may be proved and which are therefore*1880 entitled to participate in the benefits of the act and are bound by its provisions, including a discharge. Section 17 (30 Stat. 550) enumerates the debts not affected by a discharge, that is, those exempted from its operation. It is apparent that the exemptions do not rest upon any theory of the exclusion of the creditor from the bankrupt act or of deprivation of right to participate in the distribution, but solely on the ground that although such rights are enjoyed, an exemption from the effect of the discharge is superadded. The text leaves no room for any other view, since the exceptions in terms are accorded to certain classes of debts which are provable under § 63, and therefore debts which are entitled to participate in the distribution, the language being: "A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as," etc.
* * *
While the considerations just stated dispose of the question of waiver and election, they virtually also serve to indicate the error which underlies the contention as to res judicata, that is, a confusion of thought arising from treating things which are different as one and the same. To constitute*1881 res judicata, it is elementary that there must be identity of cause between the two cases. In view of the text of the bankrupt law, the distinction which it makes between the general discharge and the right of a particular creditor to be exempt from the operation of such discharge it needs but statement to demonstrate the difference of cause which necessarily obtains between determining on the one hand in favor of the bankrupt whether he is entitled to a general discharge and of deciding on the other, as between a particular creditor and the bankrupt, whether the claim of that creditor is of such a character as to be exempt from the operation of a discharge. Nothing could more clearly emphasize the distinction which exists between the two subjects - that is, the granting of a general discharge and the question after it is granted whether a particular debt is exempted by law from its operation - than does the provision of the statute (§ 14c, 30 Stat. 550) authorizing a general discharge as the result of an approval of a composition, since it expressly reserves from the operation of such discharge of the bankrupt from his debts, "those not affected by a discharge." * * *
*527 *1882 We therefore hold that the discharge in bankruptcy does not bar assessment and collection of any additional tax which may be due from the petitioner for the year 1921. As a consequence it becomes necessary to decide whether the respondent erred in his determination of the additional tax, as alleged by the petitioner.
On or about July 5, 1921, the petitioner transferred to Benjamin I. Powell his half interest in the Wayne Building in exchange for $10,000 cash and Powell's stock in the Dade Furniture Company which had a par value of $32,000. The respondent attributed a book value of $22,800 to the stock and computed a profit of $22,800 to the petitioner on the exchange. The petitioner contends that the stock had no readily realizable market value at the time it was received by him and that no gain was derived from the transaction.
Section 202(e) of the Revenue Act of 1921 provides in part:
Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in*1883 exchange shall be applied against the reduce the basis, provided in this section, of the property, exchange, and if in excess of such basis, shall be taxable to the extent of the excess; * * *
The petitioner testified that the Dade Furniture Company in 1921 was losing money and that the reason he wished to obtain the stock owned by Powell was to gain control of the company and attempt to put the company upon a profitable basis. He testified that at the time he obtained the stock from Powell he considered it worthless and that he could not have sold it in the market. This means, as we view his testimony, that it has no readily realizable market value. In this respect the case is somewhat similar to , where the Board construed testimony to the effect that "There was no marketable value" to be equivalent to saying that there was "no readily realizable market value." The other evidence in the instant proceeding sustains petitioner's claim that the stock had no readily realizable market value. There is no competent evidence in the record to show the exact financial condition of the Dade Furniture Company at or about the date*1884 of the exchange, but the evidence does show that on November 4, 1922, the Circuit Court of Dade County, Florida, appointed a receiver for the Dade Furniture Company, the name of which had been changed to the McDonald Furniture Company, and that the assets of the company were sold and the proceeds distributed to the creditors of the company. The creditors received only about 50 per cent of their claims and there were no assets left for distribution to the stockholders of the company. From the evidence we are forced to the *528 conclusion that the respondent erred in attributing any value to the stock in question in the computation of the gain derived or loss sustained upon the exchange. There is no evidence in the record as to the correctness of the basis used by the respondent in the determination of gain or loss and no question was raised as to this factor. Both the petitioner and the respondent in their computations have used $10,000 as the cost to petitioner of his half interest in the Wayne Building. No question having been raised as to the basis, we assume that it is correct and hold that petitioner derived no gain upon the transaction.
No evidence whatsoever was*1885 introduced as to the claimed deduction of $1,950 for the use of an automobile, and the respondent's disallowance thereof is approved.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK, dissenting: The Board heretofore decided in this case that it had no jurisdiction because the alleged deficiency notice was not a deficiency notice within the meaning of section 274 of the Revenue Act of 1924. The Court of Appeals of the District of Columbia reversed the Board on this point and remanded the case. It thereafter developed that the petitioner was adjudicated a bankrupt on April 13, 1923. The taxes are for the year 1921. Section 282(a) of the Revenue Act of 1926 applies. This question was not presented to the Court of Appeals, and in my opinion, we should hold that we have no jurisdiction because section 282(a) provides that no petition for redetermination shall be filed with the Board after the adjudication of bankruptcy or the appointment of a receiver. Cf. Plains Buying & Selling Association,5 B.T.A. 1147">5 B.T.A. 1147.