*838 1. An amount received in excess of cost by a bondholder in discharge of his bonds before maturity by order of a court condemning the property which secured the bonds, held not taxable as a capital gain because no sale or exchange occurred.
2. The basis for computing a shareholder's gain on the liquidation of shares received as a dividend from a corporation other than the issuer is their value at the time of distribution, and, in the absence of evidence of such value, the Commissioner's determination of gain is sustained.
3. The "zero basis", applied in Helvering v. Gowran,302 U.S. 238">302 U.S. 238, and Helvering v. Pfeiffer,302 U.S. 247">302 U.S. 247, in the sale of shares received as a "stock dividend", has no application to the sale of shares of another corporation received as a property dividend.
*651 The Commissioner determined a deficiency of $2,160.23 in petitioner's income tax for 1931. Petitioner assails the treatment, as ordinary income, of profit on bonds redeemed before maturity in consequence of condemnation*839 proceedings against properties securing them, and contests the basis used in computing profit on the liquidation of shares distributed as a dividend in stock. By affirmative plea the Commissioner contends that such shares have a basis of zero. Another issue was settled by agreement.
FINDINGS OF FACT.
1. Petitioner, a resident of Paterson, New Jersey, was the owner in 1931 of $52,000 par value bonds of water companies. Of this amount $37,000 par value was issued by the Passaic Consolidated Water Co. (herein called the Water Co.); $8,000 by the Passaic Water Co.; $3,000 by the Montclair Water Co.; and $4,000 by the East Jersey Water Co. The Water Co. was incorporated on October ber *652 31, 1923, by the New Jersey General Security Co. (herein called General Security), which was the sole shareholder of the Passaic, Montclair, and East Jersey water companies and two other water supply corporations. The Water Co. issued its total capital stock, represented by 31,000 shares of a par value of $100 each, to General Security, and received in exchange all the outstanding shares of the five water supply corporations. It then took over all of the latters' assets and assumed*840 all of their liabilities.
In 1927 the Passaic Valley Water Commission was organized, and, as representative of Passaic and other New Jersey cities, acquired by condemnation all of the physical properties, rights, and franchises of the Water Co. On October 24, 1930, the commission awarded the Water Co. $13,000,000, and paid the amount on the same date into the Court of Chancery of New Jersey to protect the holders of bonds secured by mortgages on the Water Co.'s properties. By order of March 23, 1931, the court directed, inter alia, that bonds issued by the Water Co., to mature in 1939, be paid at 105 percent of par plus accrued interest of 6 percent, and that bonds issued by the Passaic, Montclair, and East Jersey water companies, to mature in 1958, be paid at 102 1/2 percent of par plus accrued interest of 5 percent upon the holders' surrender thereof on or after April 10, 1931. The Water Co. bonds were by their terms subject to call on any interest date after May 1, 1934, on 30 days' notice. The others contained no provision for call prior to maturity.
Of the $52,000 par value bonds, petitioner acquired $45,000 par value at a cost of $33,261.50. Under the court order*841 he received for them $48,931.75, inclusive of accrued interest of $1,881.75. He had held them for more than two years. In determining petitioner's income tax for 1931, the Commissioner treated the difference between cost and the amount received, or $15,670.25, as ordinary income.
2. In 1931 petitioner received $48,994.40 in liquidation of 910 shares of stock in the Passaic Holding Co. (herein called Holding Co.). He had acquired the shares on December 30, 1926, by distribution from General Security. General Security had just exchanged all but seven of the 35,000 shares of the Water Co., then outstanding, for the entire capital stock of the newly organized Holding Co., represented by 65,000 no par value shares. It immediately distributed the Holding Co. shares among its own shareholders at the rate of 3 1/4 Holding Co. shares to each share of its own stock held. They surrendered none of their General Security shares. Petitioner then held 280 shares of General Security, which he had purchased for $39,812.
The Commissioner computed a profit on the liquidation by taking 50.09 percent of the cost of petitioner's General Security shares as *653 the basis of the Holding*842 Co. shares. He reduced the cost of the General Security shares by $17,754.80, described as "Nontaxable distribution in 1926 as claimed by you", and thus used $22,057.20 in arriving at a basis of $11,048.45 for the Holding Co. shares.
In his income tax return for 1926 petitioner excluded from income $12,715.42 on the ground that it represented a nontaxable distribution of cash and bonds made in 1926 by General Security. The amount was added to income by the Commissioner as representing a distribution of earnings. The Commissioner's determination was sustained by this Board in a memorandum opinion entered January 28, 1938, Docket No. 52074. Decision was entered May 9, 1938, and petition for review was filed by the taxpayer August 9, 1938.
OPINION.
STERNHAGEN: 1. The Commissioner held that the $15,670.25 received by the petitioner in excess of the cost ($33,261.50) of the $45,000 par value of bonds is taxable as ordinary income. The petitioner urges that the gain was a "capital net gain" as defined in Revenue Act of 1928, section 101 (c)(1). 1 To succeed he must establish that the gain was "from the sale or exchange" of the bonds.
*843 He argues that the bonds did not mature and were not redeemed in 1931; that the payment was received out of the condemnation award, and not from the bond obligor or in accordance with the terms of the bond, and that prior decisions 2 involving such circumstances and denying the use of the capital gain rate are therefore distinguishable. The argument is fallacious. The issue must be stated and met in the statutory language of sale or exchange. If there be no sale or exchange, the question whether there was a redemption is of no significance. It is no avail to a taxpayer that his case is not within the scope of earlier adverse decisions unless by showing this he also brings himself within a permissible interpretation of the words of the statute.
*844 It is impossible to say that petitioner either sold or exchanged his to an end and he was compensated in the specified amount. No one bought his bonds and he had no choice to hold them longer. It is only because he had held them more than two years that there is reason to think about whether the capital gain tax applies; but the *654 thought is ended when it appears that the occasion on which he received his gain was not a "sale or exchange", ; (on review D.C.App.).
2. The second issue is badly snarled. The petitioner in 1931 received $48,994.40 from the Passaic Holding Co. in liquidation of the 910 shares which he held as the result of the distribution to him in 1926 by the New Jersey General Security Co., in which he held 280 shares; and the question is, How much of this amount is taxable gain in 1931? This question is simple enough, and, as so stated, its answer should not be difficult. But the difficulty is found in trying to adjust the treatment to be applied in 1931 to what has been done in the past.
*845 When in 1926 the 910 shares of the Passaic Holding Co. were received from the General Security Co. this was a dividend and taxable to petitioner as such at the full value at that time of the 910 shares. It was not a "stock dividend", . Such value then became the basis to be thereafter used in lieu of cost when the 910 shares were disposed of. The liquidation which occurred in 1931 was ordained by statute to be treated as the equivalent of a sale, Revenue Act of 1928, section 115(c); and hence the gain or loss is the difference between the $48,994.40 received and the basic value.
What that value is can not be ascertained from this record. No attempt has been made by either party to prove it, if indeed its materiality has ever been apprehended. The evidence was submitted in a written stipulation of facts filed at the hearing without much discussion or argument. The pleadings have been several times amended, the latest on both sides being filed by consent after the hearing and after the Board's memorandum opinion in the case involving 1926 had been entered and served. It can not be said, therefore, that a full hearing has not*846 been had or that either party has had less than an adequate opportunity to prove all the facts or present all the argument necessary to support his position. For the Commissioner no brief has been filed, although by his amended answer filed after the hearing he pleads error in his treatment of the $48,994.40 and prays for an increase in the deficiency "accordingly", thus assuming the burden of proof as to the increase. The petitioner in a reply demurs. In this state of the record the decision can not be made accurately on the merits but must fall as best it can in accordance with the way it is submitted.
Apparently the income shown on the petitioner's 1931 return contained no part of the $48,994,40. The Commissioner in determining the present deficiency computed the gain by a complex computation of *655 cost of the 910 shares. 3 From the admitted cost of $39,812 which petitioner had originally paid for his 280 shares of General Security stock, $17,754.80 is subtracted as a nontaxable distribution in 1926 as said to have been then claimed by the taxpayer. The justification for the subtraction does not appear; the deficiency notice shows only that it is the total of 280*847 shares at $63.41 a share; and the stipulation states only that in his 1926 return petitioner excluded $12,715.42 "on the basis that it represented a nontaxable distribution of cash and bonds" from the General Security Co., the exclusion of which is the subject matter of Docket No. 52074. It does not appear why the $12,715.42 distribution of "cash and bonds" should have any relation to the distribution of Holding Co. shares or to the figure of $17,754.80. Proceeding with the Commissioner's computation, the remainder of $22,057.20 is treated as the total cost of the composite 280 shares of General Security and 910 shares of Passaic Holding, and of this, 50.09 percent, or $11,048.45, is allocated to the 910 Holding Co. shares as their cost basis. This may, in the absence of assignment of error and evidence, be taken as the value of the 910 shares when received. This in turn is reduced by "nontaxable distributions" in 1929 and 1930. For the entire 920 shares the "adjusted cost basis" is taken as $6,546.45 and the resulting "gain on liquidation" as $42,986.35.
*848 The fault which the petitioner in his petition found with the Commissioner's deficiency determination was that $17,754.80 was taken as the amount excluded from income in 1926 to reduce the basis instead of the $12,715.42 which petitioner says he excluded. But, as has been said, the $12,815.42 was not thought to be the value of these 910 shares but the value of some cash and bonds. The Commissioner's affirmative claim for an increase in the deficiency is based upon a use of a so-called "zero basis" referred to in , and . But that "zero basis" was applied to a "stock dividend", that is, a dividend distributed by a corporation in shares of its own stock. It is not shown to have any application to a property dividend such as this.
In such a state of the record, we can do no better than leave the deficiency where the Commissioner originally found it.
There is a third issue as to salary, which the Commissioner concedes.
Thus the determination on the first and second points is sustained, the Commissioner's affirmative claim for an increase is denied, and the determination*849 on the third point is reversed.
Judgment will be entered under Rule 50.
Footnotes
1. (1) "Capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. ↩
2. ; ; ; dismissed, C.C.A., 2d Cir.; see also ; ; ; . Cf. ; , which consider the redemption of shares of stock in the light of the statutory provision that liquidation shall be treated as payment for the shares. ↩
3. An additional 10 shares admittedly bought in 1928 for $650 was included in the computation; but since it is not the subject of dispute, it is not important here. ↩