*1188 Where assets were transferred to a corporation for its stock, and upon receipt of the stock it was retransferred for cash, all being done pursuant to an agreed plan of organization, held, the steps necessary to carry out the agreement constituted a single transaction in determining the basis for computing depreciation.
*1123 This proceeding is for the redetermination of a deficiency in income tax, asserted by the respondent for the year 1928 in the amount of $361.74. The error alleged is that respondent did not use the proper basis for computing depreciation of assets.
FINDINGS OF FACT.
Three partners, M. C. Collins, J. M. Collins and C. L. Collins conducted a business under the name of Coco-Cola Bottling Company of *1124 Omaha, Nebraska. They also owned all of the capital stock of Collins & Sons, which owned the building occupied by the Coco-Cola Bottling Company.
On September 30, 1927, they gave an option for the purchase of all the assets of the Bottling Company, including the Coca-Cola franchise. There was also included an*1189 option to buy the real estate and building owned by Collins & Sons. After some negotiation it was agreed that the purchasers would form a corporation and would purchase the Collins's bottling business and the real estate for $170,000. It was agreed that $35,000 in cash would be paid for the real estate, and for the bottling business the vendors were to receive $20,000 in 6 1/2 per cent preferred stock and as much common stock in the proposed corporation as the vendee chose to give. The common stock was to be repurchased for $115,000.
Pursuant to that agreement, the petitioner was incorporated and organized on November 26, 1927. Its authorized capital stock was $20,000 of preferred and $67,500 of common. On the same day the petitioner paid the cash agreed upon for the real estate and issued to the vendors all of its preferred and $26,500 of its common stock in exchange for all the assets and good will used in the vendors' bottling business. No other stock of the petitioner was issued at that time. Upon receipt of the common stock the vendors transferred it to the vendees, pursuant to the agreement, for $115,000.
At the time the partnership assets were transferred to petitioner*1190 they were inventoried at the following values: Buildings, $31,960; machinery and equipment, $14,580.70; automobiles, $6,975; ice boxes, $4,069.50; and furniture and fixtures, $90. These values were used by petitioner in computing depreciation of the assets in its income-tax return for 1928. The respondent allowed depreciation on the basis of values in the hands of the transferors, thus reducing by $2,059.53 the amount allowable for such deduction.
OPINION.
MARQUETTE: The respondent contends that the vendors exchanged all the assets of their bottling business for all of petitioner's stock outstanding at the time, and thus the vendors were in control of petitioner immediately after the exchange. Hence, under section 113(a)(8) and section 114 of the Revenue Act of 1928, the basis for depreciation of the transferred assets shall be the same as it would be in the hands of the transferors. Respondent argues that we must give effect to what persons have done rather than to that which they intended, and relies upon ; affd., *1191 . *1125 In that case the taxpayers sold one-half the stock in their corporate business. They contended that the sale was not a taxable transaction and argued that they could have transferred the same interest in their business by another method, with no resulting income tax. We there held that the substance of the transaction was a sale of stock and that income-tax liability should be determined by what actually occurred, rather than by what might have taken place.
That decision is sound, but in our opinion it does not support the respondent's contention in the present proceeding. Here, the petitioner agreed to and did purchase the assets of a business for a price, about one-seventh of which was paid in stock and the balance in cash. It is true that in the first instance stock, instead of money, was exchanged for the assets. The respondent insists that we must stop at that point, disregard the balance of the agreement and the fulfillment thereof.
We can not agree with that view. The transaction must be considered in its entirety, and effect must be given to the whole. A like question was before us in *1192 . In that case, as here, the agreement called for the issue of stock in payment for property in the first instance, the stock later to be taken over for cash, which was done. We there said:
Where there are several steps to be taken in effecting the organization of a new corporate enterprise, it is impossible to have them all occur at the same instant. One step must precede another and we do not think the language of section 203, "immediately after the transfer" intended that questions of tax liability should be determined by the fact that a transfer of property occurred a few days before cash was paid in, where both are essential steps in the plan of organization.
See also, to like effect, .
In West Texas Refining & Development Co. et al., supra, 16 days elapsed between the issue of stock and its taking over for cash. In the present proceeding the exact time elapsing between those two steps of the transaction is not in evidence. It is in evidence that "upon receipt of the common stock" it was transferred for the agreed money consideration. *1193 As used in that connection the word "upon" can only mean that the transfer of the stock for money was made with convenient dispatch and without undue delay. It was a step in the plan of corporate organization, necessary to complete the proposed transaction. We think the respondent erred in his determination.
Decision will be entered under Rule 50.