*2381 1. On an exchange of stock for stock, cash, and debenture notes that as part of the same transaction were paid in cash, held that the proceeds of the debenture notes together with the cash are taxable gain under the provisions of section 202(e) of the Revenue Act of 1921 as amended.
2. The basis for determining loss on certain real estate determined.
*502 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1923, for which year the respondent has determined a deficiency in the amount of $19,198.98.
The petitioner alleges two errors - (1) that the respondent erred in including in his income an item of $44,740.74, representing an alleged profit on an exchange of stock of the National Malleable Castings Co. for stock of the National Malleable & Steel Castings Co., together with debenture notes and cash, and (2) that the respondent erred in the amount that he allowed as a deduction from taxable income as a loss on the sale of certain real estate.
*503 FINDINGS OF FACT.
The petitioner*2382 is an individual with his office and residence at No. 41 Millville Avenue, Naugatuck, Conn.
On March 1, 1913, the petitioner owned 4,000 shares of the capital stock of the National Malleable Castings Co., a corporation having its principal place of business at Cleveland, Ohio. This stock had a fair market value at that date of $800,000. In 1920 the capital stock of this corporation was increased and the petitioner received four shares for one which he then held or a total of 16,000 shares of a par value $50of each. December 27, 1923, the National Malleable Castings Co. was reorganized, the name of the new company being the National Malleable & Steel Castings Co. For each of the 16,000 shares of his old stock the petitioner received 1 1/2 shares of stock in the new company, with a par value of $50 each, $6 of debenture notes of the new company, and 50 cents in cash, or a total of 24,000 shares of stock of a par value of $1,200,000, $96,000 of debenture notes, and $8,000 in cash. Concurrently with the exchange the debenture notes were redeemed at par, but the petitioner still retains all of the 24,000 shares of stock except 1,500 shares which he gave to his wife in 1924. The*2383 stock is closely held, is not listed on any stock exchange, and during the period which the petitioner owned stock in the concern he never sold any except to the company itself, but the 24,000 shares of stock which he received in the reorganization had a readily realizable market value of at least as much as $800,000, the March 1, 1913, value of the original shares.
In 1923 the petitioner was the owner of three contiguous lots of land on La Salle Street in Chicago, Ill., on which had been erected three separate buildings prior to the date of his acquisition of the property. These lots were sold during the taxable year as an entire tract to the University of Chicago for $762,591.29. These lots and the buildings thereon will be designated for convenience as the Morris Plan Bank Building, the Watson Building, and the Williams Building. The Morris Plan Bank Building, occupying a lot containing 2,934 square feet, was inherited by the petitioner and his mother on the death of his father, Bronson B. Tuttle, in 1903. By his will, Bronson B. Tuttle left all the residue of his estate, which included this property, to his wife and the petitioner in equal proportions. In the probate proceedings*2384 at Naugatuck, Conn., this property was appraised at $250,000. The petitioner and his mother continued to hold this property in common until 1914, when the petitioner's mother conveyed her one-half interest in it to the petitioner as a gift. In 1899 the petitioner's father leased the lot for a period of 99 years for an annual rental of $10,000 and at the same time sold the building thereon to the lessee. During the years 1912 to 1914, this property, subject to the lease, was worth $250,000.
*504 Under the will of Bronson B. Tuttle the petitioner and his mother also inherited a property in Chicago known as the Electrical Building, which was appraised in the inventory of his estate at $254,090, which figure represented only the equity in the plot, as it was subject to a mortgage, subsequently paid, of $45,910, this making the value of the lot at the date of petitioner's acquisition of his one-half interest $300,000. In 1905 this property was exchanged by the petitioner and his mother for the Watson Building, which property contained 4,444 square feet. The exchange was an even one, with a recited consideration of $250,000, which figure was less than the value of the property*2385 and used in order to reduce the commissions to be paid for making the exchange. The market value on the date of the exchange of the Watson Building and lot was $300,000. At this time $6,250 was paid in commissions, $1,573.61 in adjusting items at the time of the exchange and $1,816 on improvements to the alley, making a total cost of $309,639.61, of which the petitioner's one-half is $154,819.80.
The petitioner and his mother continued to hold this property until September, 1914, when his mother conveyed her one-half interest to the petitioner as a gift.
The value of this parcel of ground was the same on March 1, 1913, and in September, 1914, $94 per square foot, making a total of $417,736. The building, which was built about 1874, was worth $7,700, making a total value of $425,436, one-half of which is $212,718.
The cost to the petitioner of the Watson Building is:
| One-half acquired in 1905 | $154,819.80 |
| One-half acquired in 1914 | 212,718.00 |
| 367,537.80 |
From 1907 to 1912 the petitioner acquired from several persons their interests in the property known as the Williams Building, containing 2,489 square feet, at a total cost of $209,156.02. This property, *2386 on March 1, 1913, was worth the same as the adjoining Watson property - $94 a square foot, making a total of $233,966. The building was obsolete, having been built about 1874, and was worth $4,000, making a total value for the property of $237,966.
The cost and March 1, 1913, values of the three properties are as follows:
| Cost | Mar. 1, 1913, | |
| value | ||
| Morris Plan Bank Building | $250,000.00 | $250,000.00 |
| Watson Building | 367,537.80 | 425,436.00 |
| Williams Building | 209,156.02 | 237,966.00 |
| 826,693.82 | 913,402.00 |
*505 The petitioner in his original return reported a profit of $44,740.74 on the exchange of stock of the National Malleable Castings Co. for stock of the National Malleable & Steel Castings Co., together with debenture notes aggregating $96,000 and cash in the amount of $8,000, which the respondent accepted as correctly reflecting the profit on this transaction. In computing the loss on the sale of the Chicago real estate the respondent used $775,646 as the March 1, 1913, value, $770,706.77 as cost, and computed a loss of $8,115.48, disallowing an alleged loss of $56,080.10, thereby increasing income by the amount of $47,964.62 and resulting*2387 in a proposed additional assessment of $19,198.98.
OPINION.
BLACK: During the calendar year 1923 the petitioner was the owner of 16,000 shares of stock of the National Malleable Castings Co., which shares he had received in exchange in 1920 for 4,000 shares of stock in the same company, which we have determined had a March 1, 1913, value of $800,000. In December of 1923 the National Malleable Castings Co. was reorganized. Under the terms of reorganization 1 1/2 shares of stock in the National Malleable & Steel Castings Co., together with $6 in debenture notes and 50 cents in cash, were to be exchanged for each share of stock in the National Malleable Castings Co. The petitioner exchanged his 16,000 shares of the original stock for 24,000 shares of the new, plus $96,000 worth of debentures and $8,000 cash. In regard to the transaction, he testified as follows:
Q. Altogether you got 24,000 shares of the capital stock of the National Malleable and Steel Castings Company, $96,000 of debenture notes and $8,000 in cash?
A. Yes. Q. Were these notes redeemed? A. Yes, sir. Q. At the same time? A. Yes, sir.Q. So that the actual cash you got was $104,000?
*2388 A. Yes.So we hold that what petitioner in reality received in exchange for his 16,000 shares of common stock in the old company was 24,000 shares common stock of the same par value per share in the new company, and $104,000 in cash. The receipt of the common stock is not taxable, regardless of its value on account of its having been received in a reorganization.
The petitioner contends that none of the transaction is taxable and that it falls within the provisions of subdivision (e) of section 202 of the Revenue Act of 1921, as amended by Public Act 545, 67th *506 Congress, taking effect January 1, 1923, and that the cash and the proceeds of the redemption of the debenture notes are to be applied against and used to reduce the basis of cost, and that if this method is followed, there will be no tax on the transaction. Respondent contends that the petitioner properly treated the transaction in his original return, wherein he returned a profit of $44,740.74 on this transaction, treating the entire $8,000 cash as profit. By the method of apportioning the cost between the debenture notes and the 24,000 shares of common stock (the method used by petitioner in his original*2389 return), respondent arrived at a profit of $36,740.80 from the subsequent cashing of the debenture notes. In the alternative the respondent contends that if the Board should hold that the debenture notes received were equivalent to cash, then the whole $104,000 should be treated as cash and the deficiency accordingly increased.
Section 202(e) of the Revenue Act of 1921, as amended, reads as follows:
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 exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed*2390 in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.
From the evidence we are of the opinion that as a result of the transaction the petitioner in exchange for his 16,000 shares of stock received 24,000 shares of stock of $1,200,000 par value and $104,000 in cash, and that the respondent was in error in attempting to compute a profit on the debenture notes on the theory that their redemption was a separate transaction. These 24,000 shares of common stock received in exchange had a readily realizable market value and were worth at least as much as $800,000, the March 1, 1913, value of the original shares. Accordingly, under the provisions of the latter half of subdivision (e) of section 202, as amended, of the Revenue Act of 1921, the taxable gain on the transaction is $104,000, the amount of cash received in the transaction.
The petitioner sold for $762,591.29, three lots in the city of Chicago, which we have found had a cost of $826,693.82 and a March 1, 1913, value of $913,402. We are of the opinion that in this transaction*2391 the petitioner sustained a loss of $64,102.53, less the proper *507 amount of depreciation on the buildings on the Watson and Williams properties, which loss he is entitled to deduct in determining his net income for the taxable year.
Judgment will be entered under Rule 50.
Reviewed by the Board.