1931 BTA LEXIS 1746">*1746 1. BASIS OF COST. Where partners sell the assets of a partnership to a corporation and receive in payment therefor the common stock of the corporation and are immediately in control of more than 80 per cent of all the outstanding voting stock of such corporation, and there was no preferred stock outstanding at that time, the basis of cost of such assets to the corporation in determining the profit on a subsequent sale of such assets is their cost to the partnership from which the purchase was made.
2. DEPRECIATION. Respondent's determination on amount of depreciation sustained, for lack of any evidence to show that taxpayer sustained any greater amount of depreciation than that which respondent has allowed.
23 B.T.A. 1229">*1229 The respondent determined deficiencies of $1,340.87 and $4,643.70 in petitioner's income taxes for the calendar years 1925 and 1926, respectively. No deficiency was determined for 1924. The petitioner alleges that the respondent erred (a) in disallowing a loss claimed by the taxpayer on an oil and gas lease which proved worthless; 1931 BTA LEXIS 1746">*1747 (b) in disallowing depreciation on bus and truck equipment for the years 1924, 1925 and 1926; (c) in determining the profits on a sale of a certain franchise and of certain property and equipment of the petitioner in March, 1926.
FINDINGS OF FACT.
The Paradox Land & Transport Company was originally a partnership composed of George H. Swerer, John T. Donovan, Charles L. Perry and J. B. C. Williams. The firm was engaged in a general trucking and hauling business in Colorado and New Mexico and for its purposes owned and operated a number of trucks and automobiles. It was also engaged in road contracting and had some contracts with highway authorities for road work.
Early in 1921 the partnership obtained from the Public Utilities Commission of the State of Colorado a franchise to operate a bus line between Denver and Fort Collins, Colo. About this time the petitioner was incorporated with an authorized capital stock of $50,000, of which $25,000 was nonvoting preferred stock and $25,000 was common stock with voting powers. It does not appear what, 23 B.T.A. 1229">*1230 if anything, the bus franchise cost the partnership. An item of franchises and contracts was carried on the books1931 BTA LEXIS 1746">*1748 of the partnership at $14,700, but what these contracts and franchises were and the separate cost of each, was not shown on the books.
After the incorporation of petitioner all of the properties, rights, contracts, and franchises of the partnership were transferred to the corporation on May 5, 1921, on the terms and conditions as shown in the minutes of the directors' meeting, held on that date, as follows:
UPON MOTION duly made and seconded and from an affirmative vote of all the directors present, the following preambles and resolutions were adopted:
WHEREAS, The PARADOX LAND AND TRANSPORT COMPANY, a copartnership doing business in New Mexico and Colorado, have by their offer in writing, offered to sell and transfer to this corporation their entire equipment and business in consideration of the issuance to it or its order, common stock of this company in the sum of $20,000.00, which said offer is in words and figures as follows, to-wit:
THE PARADOX LAND AND TRANSPORT COMPANY,
Denver, Colorado, March 10, 1921.
GENTLEMEN: The Paradox Land and Transport Company was organized as a copartnership in December 1919 and since that time have been doing a general transport1931 BTA LEXIS 1746">*1749 business in Colorado and New Mexico. Realizing the advantages to be derived from an incorporation of their partnership and for the purpose of incorporating, the Paradox Land and Transport Company, a copartnership, does hereby offer to transfer to The Paradox Land and Transport Company, a corporation, all their right, title and interest in and to their entire equipment and business, its rights in and to one certain franchise from the Public Utilities Commission of Colorado, being a certificate of necessity and convenience allowing such company to operate a bus line from Denver to Ft. Collins, Colorado, all its right, title and interest in and to one certain contract of hauling with the Conners Construction Company, now operating at East Las Vegas, New Mexico.
In consideration of such transfer as offered by the partnership, the partnership will take the sum of $20,000.00 payable in the common stock of the corporation and in addition the corporation is to assume all the outstanding obligations of the partnership according to the following schedule:
| Notes payable | $5,200.00 |
| L. E. Chenault. | |
| Note payable | 400.00 |
| D. C. Donovan. | |
| Note payable | 230.00 |
| H. C. Lindsley. | |
| Accounts payable. | |
| Reiber Garage | 11.15 |
| Texas Company | 76.12 |
| White Auto Co | 1,409.41 |
| Walling Tire Co | 500.00 |
| A list of the partnership's equipment is as follows: | |
| 1 One White 3 1/2 ton Truck No. 68076, Engine No. 1023. | |
| 1 One White 2 ton Truck No. 65163 Engine No. 35611. | |
| 1 One International One Ton Truck. | |
| 1 One large tent for housing trucks. | |
| 1 Lee Dump Body 1 and 1/2 yard. | |
| 1 Express Body for 2 ton white. | |
| Tools, tarpaulins, tires, tubes and other numerous small items | $12,610.99 |
| Cash | 37.69 |
| Contracts and Franchises | 14,700.00 |
| $27,448.68 |
(Signed) PARADOX LAND AND TRANSPORT CO.
By
23 B.T.A. 1229">*1231 WHEREAS, in the judgment of the board of directors of this company such property is necessary for the business of this company and is of fair and reasonable value of twenty thousand dollars, THEREFOR RESOLVED
That it be adjudged and declared that said property is of the fair and reasonable value of twenty thousand dollars and that the same is necessary for the business of the company, and it is
FURTHER RESOLVED that upon the conveyance and transfer to this company of all said property rights and privileges by instruments of conveyance or transfer satisfactory to the attorneys for the company, the officers of this company be and they are hereby authorized and directed1931 BTA LEXIS 1746">*1751 to prepare, sign, and seal certificates of stock pursuant to the by-laws and to issue certificates of the fully paid common stock of this company in the aggregate amount of twenty thousand dollars to the said The Paradox Land and Transport Company, a co-partnership.
UPON MOTION, duly seconded, the secretary was authorized to sell all or any part of the preferred shares of this company provided for in the articles of incorporation the proceeds from such sale to be used for the purpose of buying new motor equipment for the company, and to retire any indebtedness of the company that the officers might think necessary.
The undersigned being all the directors named in the Articles of Incorporation of the Paradox Land and Transport Company, do hereby ratify and confirm the above and foregoing Articles of Incorporation, by-laws, and minutes of the organization meeting and do ratify and confirm and adopt all resolutions and business transacted at such organization meeting as shown by the minutes above.
(Signed) JOHN T. DONOVAN.
HERBERT R. MOSLEY.
GEO. H. SWERER.Twenty thousand dollars of the common stock was issued to the partnership in consideration for its property as provided1931 BTA LEXIS 1746">*1752 in the aforesaid resolution. Several months later in 1921, $5,000 par value of common stock and $500 cash were paid to one, Edward Bagnall, for two Cole touring cars and an oil and gas lease in New Mexico and a coal lease in Colorado.
23 B.T.A. 1229">*1232 Three thousand six hundred dollars of the preferred stock was all that was ever issued. It was not shown to whom this was issued nor when it was issued.
In 1926, petitioner sold all of its property, except one bus, for $75,000, to the Colorado Motor Way of Denver. The respondent, in determining the profit on the transaction, did not allow any cost for the bus franchise and computed the profit on the sale in the following manner:
| Profit reported on sale of line and equipment | $12,002.41 |
| Correct amount | 39,002.41 |
| Additional profit | 27,000.00 |
| Sale price | $75,000.00 |
| Cost | 35,997.59 |
| Profit | 39,002.41 |
The profit on the sale is computed under the provisions of section 202 of the Revenue Act of 1926 and the regulations promulgated thereunder.
From time to time during the taxable year the petitioner owned and operated buses and trucks and claimed depreciation of $22,911.87 for 1925 on its income-tax return, but only1931 BTA LEXIS 1746">*1753 charged off $12,329.05 as depreciation on its books. Respondent allowed the $12,329.05 charged off by petitioner on its books and disallowed $10,582.82 not so charged off. For 1926 petitioner claimed $14,497.80 depreciation on its income-tax return, but only charged off $9,100 on its books. Respondent has allowed the $9,100 depreciation charged off by petitioner on its books but has disallowed $5,397.50 which petitioner did not charge off on its books.
No evidence has been introduced showing the character of the vehicles used in petitioner's business, probable life, character of the use, or that the amount of depreciation allowed by the respondent was insufficient to take care of the depreciation actually sustained. No evidence was introduced relative to the loss claimed on the oil and gas lease. The principal office of the petitioner is at 1717 California Street, Denver, Colo.
OPINION.
BLACK: Petitioner claims additional depreciation for the year 1924, but as no deficiency was determined for that year, we have no jurisdiction as to that year. The appeal in so far as it relates to 1924 is hereby dismissed.
Relative to the claim for increased depreciation for 19251931 BTA LEXIS 1746">*1754 and 1926. the burden of proof is upon the petitioner to show that the determination made by the respondent is erroneous. The allowances made by respondent covered all the depreciation which petitioner had 23 B.T.A. 1229">*1233 charged off its books in 1925 and 1926. In the absence of any evidence before us showing that petitioner actually sustained greater depreciation than it charged off its books, we can not allow more. The mere fact that petitioner claimed as a deduction on its income-tax returns a greater amount of depreciation than it had charged off on its books is no proof that it had actually sustained such depreciation. A contention of this kind must be supported by evidence. Respondent is sustained on this point. The action of the respondent in disallowing loss on the oil and gas lease is also approved as no evidence was introduced substantiating any such loss.
In the matter of the profit by petitioner on the sale in 1926 of the bus franchise and other property to the Colorado Motor Way of Denver, it is contended by the respondent that no cost basis is allowable for the franchise, for the reason that when the petitioner corporation was organized the partnership remained1931 BTA LEXIS 1746">*1755 in control because it owned in excess of 80 per cent of the issued capital stock and under such circumstances the cost basis is the cost to the transferor partnership, and that the evidence does not show any cost of the franchise to the partnership. We think respondent must be sustained on this point.
The Commissioner used as a basis on the sale of petitioner's properties in 1926, including the franchise, the cost to the partners.
Section 204(a) of the Revenue Act of 1926 provides:
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 the 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 * * * 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 to1931 BTA LEXIS 1746">*1756 the year in which the transfer was made.
Paragraph 4 of subdivision (b) of section 203 reads as follows:
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.
From the foregoing it is apparent that, inasmuch as the 2,000 shares of common stock issued to the partners were not only 80 per cent of the entire common stock, but were issued some six months prior to 23 B.T.A. 1229">*1234 the issuance of the remaining 500 shares of common stock to one Bagnall, unquestionably the partners were in control of the corporation as defined by subdivision (i) of section 203, which provides that:
Control means 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.
1931 BTA LEXIS 1746">*1757 The partners being in control of the corporation, within the meaning of the quoted statute, after the partnership assets were transferred to it, the basis of cost of the franchise in determining the profit on its sale in 1926 was its cost to the partners. , and cases there cited. Petitioner has offered no adequate proof of any cost to the partners of this franchise to operate a bus line between Denver and Fort Collins, Colo. The only evidence which petitioner has offered even tending to show the cost to the partners of such franchise was the language in the resolution which we have incorporated in the findings of fact, wherein it was stated that contracts and franchises were carried on the books of the partnership at a valuation of $14,700. This is not adequate evidence of cost.
We must sustain respondent's determination of the profit made on the sale of petitioner's assets and franchise in 1926 because we have no sufficient evidence before us to show that it was error.
Decision will be entered for the respondent.