*1083 1. The petitioner, a Washington State corporation, was formed in 1927 by three devisees, who in that year transferred to it the residuary estate of their testator, in consideration of the issuance to them of all of its preferred stock, in the respective proportions that each owned interests in the estate prior to its transfer. Its common stock, which was the only stock with voting rights, was acquired by, and issued to, only two of the three devisees. In 1928 four of the lots so acquired from the devisees were sold to satisfy tax liens thereon which were in excess of the then value ($2,800) of the lots, which was also their value at the time of their acquisition by the petitioner. Held, petitioner sustained no loss by reason of such sale in 1928 and the abandonment of the lots in that year.
2. One of the devisees owned solely (but not as a devisee of said testator) an undivided one-half interest in one of the lots and building thereon transferred to petitioner, and for such interest received and accepted in payment therefor petitioner's promissory note for $20,000, bearing interest at 6 per cent and due in three years. This property was sold in 1928 for a net consideration*1084 of $193,962.74. The appraised value for estate tax purposes of the undivided one-half interest in this property which was acquired from the three devisees, less depreciation, and amounting to $110,469.74, was determined by the Commissioner to be its cost to the petitioner, and as to such determination there was no error assigned in the petition. The Commissioner determined $20,000 to be the cost of the one-half of this property for which the petitioner had given its note in that amount, and computed the profit on the sale thereof on that basis. Held, respondent did not err in so doing.
*328 The respondent determined deficiencies in income tax in Dockets Nos. 53097 and 61619 for the years 1928 and 1929 in the amounts of $46.07 and $7,646.18, respectively. In Docket No. 53097 the petitioner claims there is no deficiency and that there has been an overpayment of the tax in the sum of $289.93, so that the amount in dispute is $336. The dispute arises because of the disagreement between petitioner and respondent*1085 as to the amount of loss, if any, which the petitioner is entitled to deduct on account of its abandonment in 1928 of lots Nos. 3, 4, 7 and 8 in block 10 of Gamma Poncin's addition to the City of Seattle, Washington.
In Docket No. 61619 the issue is on what basis gain or loss on the sale in 1929 of certain improved real estate hereafter designated as *329 lot No. 2 (in block 8 of Boren and Denny's plat), at the southwest corner of Second Avenue and Marion Street in Seattle, Washington, should be computed, the petitioner claiming there is no deficiency for said year.
These proceedings were consolidated for hearing and are submitted on the pleadings, stipulation, testimony of three witnesses and numerous exhibits, from all of which we make our findings of fact.
FINDINGS OF FACT.
The petitioner, Poncin Corporation, was incorporated under the laws of the State of Washington in April, 1927. Its capital stock consisted of 7,050 shares of preferred stock with a par value of $100 per share and 10,000 shares of common stock, with no par value, but with sole voting power and control of the affairs of the corporation. The articles of incorporation also provided that there*1086 should be an initial non-par capital of $500, with which the corporation was to begin to carry on business, $500said to be received as a part of the consideration for the issuance of shares of common stock of no par value.
The petitioner corporation was formed, pursuant to an agreement among the three residuary devisees under the will of Gamma Poncin (who died November 11, 1922), for the purpose of taking over property willed to them by him and also the undivided one-half interest in lot No. 2, at thf southwest corner of Second Avenue and Marion Street, which one-half interest was owned by Claude M. Poncin, individually, a son of said Gamma Poncin by his first wife, Eliza Poncin, who, equally with her husband, had owned the lot. Eliza Poncin died February 28, 1911, having willed her undivided one-half interest in lot No. 2 to Claude M. Poncin. After the separation of Gamma Poncin and Eliza Poncin, they entered into a written agreement on September 13, 1909, whereby she leased her one-half interest in lot No. 2 to him for a period of 15 years and in the same instrument gave him an option to purchase her one-half interest therein within said period for $20,000, but the option was*1087 to terminate upon his death and should not after his death be exercised by his heirs, personal representatives, or assigns. The will of Gamma Poncin, dated February 13, 1917, and duly probated, after making certain bequests, devised two-fifths of the residue of his estate to his second wife, Birdie L. Poncin, two-fifths thereof to his son and one-fifth thereof to his niece, Birdie V. Cline, the net amount thereof to her, however, being limited to the sum of $150,000.
On May 18, 1926, Birdie L. Poncin, the widow of Gamma Poncin, deceased, Claude M. Poncin, his son, and Birdie V. Cline, his niece, the sole heirs and the residuary devisees under his will, entered into *330 an agreement pursuant to which the petitioner was incorporated, and by deed dated July 1, 1926, but not executed by all the said devisees until April 11, 1927, transferred and conveyed to the petitioner their residuary interests in the estate of Gamma Poncin, deceased. In the same instrument, the undivided one-half interest in lot No. 2 owned by Claude M. Poncin (the other undivided one-half interest therein being owned by said three devisees) was conveyed to the petitioner, the consideration therefor being*1088 the petitioner's note for $20,000, bearing 6 per cent interest from its date, April 11, 1927, and due three years after its date.
Birdie L. Poncin and Claude M. Poncin were the executors and trustees under the will of Gamma Poncin, deceased, and they and Birdie V. Cline formed the petitioner corporation because of disputes arising in connection with the administration of the Gamma Poncin estate. Claude M. Poncin was very desirous of forming such corporation and transferred his undivided one-half interest in lot No. 2 aforesaid for petitioner's $20,000 note, his one-half interest being then of the value of at least $103,000.
In consideration of the conveyance to the petitioner by the three devisees of their residuary interests in the Gamma Poncin estate, which was made pursuant to their agreement of May 18, 1926, capital stock of petitioner was issued to them as follows: Preferred stock, two-fifths to Birdie L. Poncin, two-fifths to Claude M. Poncin, and one-fifth to Birdie V. Cline; common stock, except for trustees' qualifying shares, ove-half to Birdie L. Poncin and one-half to Claude M. Poncin, none being issued to Birdie V. Cline.
The property heretofore referred to as*1089 lot No. 2 was set up on the journal of the petitioner as follows:
| Second and Marion | $256,439.74 | |
| Lot 2, Boren and Denny's Plat of the Town (now City) of Seattle. | ||
| Undivided 1/2 appraised in Estate of Gamma Poncin Deceased (as raised by U.S. Estate Tax Agents) | $112,000.00 | |
| Assessment paid | 53.07 | |
| $112,053.07 | ||
| Less depreciation on building Nov. 1, 1922 to Apr. 1, 1927 | 1,583.33 | |
| $110,469.74 | ||
| Undivided 1/2 turned in to Corporation by Claude M. Poncin 1913 Value (as on G.P. books) 1/2 of 300,000 | $150,000.00 | |
| Less depreciation on building 5% on 1/2 of 15,000 to Apr. 1, 1927 | 4,030.00 | |
| $145,970.00 |
*331 The said property was sold by petitioner in 1929 for a net sale price of $193,962.74, set up in the deficiency notice as follows:
| Total gross consideration | $200,000.00 | |
| Less: | ||
| Commissions | $5,750.00 | |
| Abstracts | 301.00 | |
| $6,051.00 | ||
| Deduct: | ||
| Adjustments for insurance and abstracts | 13.74 | |
| 6,037.26 | ||
| $193,962.74 |
Petitioner's income tax return for 1929 shows this property to have been acquired April 1, 1927, at a cost or March 1, 1913, value of $261,610.96, with depreciation allowable since acquisition of $1,312.50, *1090 shows the amount received therefor to be $193,962.74, and claims a net loss upon the sale of $66,335.52.
In the deficiency notice the respondent accepted as correct the net sale price of $193,962.74, but recomputed the cost of the property and the net profit on the transaction, as follows:
| Total net consideration | $193,962.74 | |
| Cost: | ||
| Undivided one-half interest received from estate of Gamma Poncin in exchange for capital stock of your corporation | $110,469.74 | |
| Remaining undivided one-half interest received from Claude Poncin in consideration for note of your corporation | 20,000.00 | |
| Initial gross cost | $130,469.74 | |
| Add: | ||
| Portion of 1926 taxes assumed and paid | 5,171.02 | |
| Total gross cost | $135,640.76 | |
| Less: | ||
| Depreciation | 1,312.50 | |
| Net cost | $134,328.26 | |
| Net profit | 59,634.48 | |
| Net loss reported | 66,335.52 | |
| Net adjustment | $125,970.00 |
The record shows the four lots heretofore described as Nos. 3, 4, 7 and 8 were appraised for estate tax purposes after Gamma Poncin's death at $700 each, or $2,800, not considering unpaid improvement taxes assessed against them (and a lien thereon) amounting to $2,238.74 at the time of the appraisement and, with interest, *1091 to *332 $2,576.93 on the date when the petitioner corporation was formed and acquired said lots by exchanging shares of its stock therefor. In addition to the improvement taxes that were a lien on these lots at the date of their acquisition by the petitioner, there were general taxes outstanding against them for the years 1922 to 1925, inclusive, in the amount of $692.84 and also some such for 1926 and 1927, and to enforce the collection of the delinquent taxes, these lots were sold at auction in 1928 by the treasurer of King County, Washington, one being bid in by the City of Seattle and the other three by the county. None of the lots sold for more than the taxes thereon.
When petitioner's books were opened the four lots were entered at the net sum of $223.07, the difference between the aforesaid improvement tax assessment of $2,576.93 and their appraised value of $2,800. This difference was claimed as a deduction in petitioner's income tax return for 1928 as a loss for real estate abandoned in that year, and the deduction was disallowed by the respondent.
The petitioner now alleges that the correct amount that should be allowed as a deduction on account of the tax*1092 sale and the abandonment of the four lots in 1928 is the full amount of their appraised value for estate tax purposes, viz., $2,800.
The petitioner's books were kept on the cash receipts and disbursements basis.
OPINION.
SEAWELL: We will consider first the issue raised in Docket No. 53097; viz., what deduction, if any, is the petitioner entitled to take in 1928 on account of a loss sustained by reason of the sale in that year of its lots Nos. 3, 4, 7 and 8 to satisfy the tax liens against them, or loss sustained because of their abandonment by petitioner in that year.
The record shows that the petitioner in 1927 acquired from Birdie L. Poncin, Claude M. Poncin and Birdie V. Cline, in exchange for its capital stock, certain property of the estate of Gamma Poncin. At the same time and in the same deed, Claude M. Poncin conveyed his undivided one-half interest in lot No. 2 which was willed him by his mother, Eliza Poncin, deceased. The record further shows that, at the time the petitioner acquired the four lots of the aforesaid devisees, the improvement and general tax liens on them exceeded their value as appraised for Federal tax purposes upon the death of Gamma Poncin, *1093 and the evidence fails to show that their fair market value was other than the same as said appraised value of $2,800, when acquired by the petitioner, neither the appraised nor the fair market value (the same) taking into consideration the aforesaid tax liens against the lots. Both parties have dealt *333 with the lots on the idea that $2,800 was both their appraised value and their fair market value.
The Statutes of the State of Washington (Rem. Comp. Stat., 1922, sec. 11272, and 1927 Supp., sec. 11097-104) provide: "The taxes assessed upon real property shall be a lien thereon from and including the first day of March in the year in which they are levied until the same are paid * * *." And the same is true of local improvement assessments. (Sec. 9376, Rem. Comp. Stat., 1922.) There is no period of redemption from a tax sale after the issuance of a tax deed, with the exception of a three-year period for minors or insane persons. (Sec. 11097-119, Rem. Comp. Stat., 1927 Supp.) The petitioner, under the law of the State of Washington, was not personally liable for the payment of real estate taxes or local improvement assessments against the lots sold as stated, the recourse*1094 of the taxing authorities being against the property.
In behalf of the petitioner it is insisted that the fact that there were delinquent taxes or assessments against the four lots has no bearing on the amount of the loss the petitioner is entitled to deduct, citing and relying on sections 23(f) and (g), 112(b)(5), 113(a)(5), and 113(a)(8), of the Revenue Act of 1928.
In petitioner's brief, argument is made that, when petitioner corporation was formed and its stock issued in exchange for the property turned over to it by the three devisees under the will of Gamma Poncin, said devisees immediately thereafter were in control of the corporation "in the same proportion as their interests in the property under the will" of Gamma Poncin; that under section 112(b)(5), supra, no gain or loss was recognized by the devisees; and that section 113(a)(8), supra, was applicable in determining the basis for gain or loss to the petitioner upon the sale of the lots aforesaid, which gain or loss would be the same as in the hands of the transferors and by the provision of section 113(a)(5), supra, the basis would be the fair market value of the property at the time of the death of Gamma*1095 Poncin, which was its appraised value of $2,800. When the lots were sold in 1928 for or on account of delinquent taxes and were abandoned by the petitioner, it is insisted it sustained a loss of $2,800.
In reply to the foregoing argument, it may be stated that the record shows that, when the three devisees transferred the lots and other property to petitioner in 1927 and received stock in exchange therefor, each of them did not in our opinion (based on the record) receive stock of petitioner "substantially in proportion to his interest in the property prior to the exchange," which would be necessary in order that section 112(b)(5), supra, might be applicable. The preferred stock of petitioner appears from the *334 record to have been received by the transferors of the Gamma Poncin estate to petitioner in proportion to their respective interests, but such is not shown to be true as to the common stock, which was the only stock that had voting power. No common stock being shown to have been received by Birdie V. Cline, one of the three transferors of the property to the petitioner, section 112(b)(5) of the Revenue Act of 1928, which is the same as section 203(b)(4) *1096 of the 1926 Revenue Act, is not applicable.
The evidence shows that at the time the four lots were conveyed to petitioner the tax and assessment liens thereon exceeded the aforesaid appraised value of $2,800, which appears to have been their fair market value at the time of acquisition by petitioner, the accrued taxes thereon not being considered. Such liens were not a personal liability of the petitioner, but attached only to the lots. It is evident, therefore, that at the time these lots, with other property, were conveyed to the petitioner, the equity or interest of petitioner in the lots was practically valueless and, in abandoning them and permitting their sale to satisfy said liens, petitioner, in our opinion, sustained no loss, and the respondent did not commit error in disallowing any deduction upon the sale of the lots. His action is accordingly approved.
In Docket No. 61619 the issue is on what basis gain or loss should be computed on the sale made in 1929 by the petitioner of the undivided one-half interest in lot No. 2 which was owned solely by Claude M. Poncin and acquired from him by petitioner in 1927.
It appears from the briefs filed that the parties are*1097 agreed that the basis for computing gain or loss to petitioner on the sale of the undivided one-half interest in lot No. 2 which was received by the three residuary devisees under the will of Gamma Poncin and exchanged for stock of the petitioner may be considered to be its value as appraised for estate tax purposes ($112,000), subject to adjustment for capital expenditures or capital deductions, and such basis as adjusted ($110,469.74) was used by the respondent in determining the deficiency, as indicated in our findings of fact. As to such one-half interest petitioner assigns no error, although the evidence indicates that at the time it was acquired by the petitioner the other one-half interest in the same lot was of the value of at least $103,000.
In petitioner's brief it is stated that in computing the loss on the undivided one-half interest in lot No. 2 acquired from Claude M. Poncin and sold as stated in our findings of fact, petitioner used in its 1929 income tax return the amount of $145,970 as set up on its books as the cost basis, being the March 1, 1913, value, at that time believing such to be the correct method of ascertaining its deductible *335 loss. The*1098 petitioner's brief correctly states that the respondent in his deficiency notice computes the cost basis to petitioner of his ove-half interest in the lot received from Claude M. Poncin at $20,000, being the amount of petitioner's note issued to Claude M. Poncin in payment therefor. It is, however, now insisted in petitioner's behalf that both above methods are wrong and that the correct basis for computing petitioner's gain or loss on the sale of the undivided one-half interest in the lot received from Claude M. Poncin is its fair market value at the time it was acquired by the petitioner in 1927, such undivided one-half interest being worth just the same as the other one-half, which had an appraised value of $112,000, considered and accepted by respondent as correct.
The transfer by Claude M. Poncin of his undivided one-half interest in lot No. 2 to the petitioner, though made in the same instrument with other transfers, was a separate transaction from the transfer to petitioner by the three residuary devisees of their interests in the estate of Gamma Poncin, deceased, including their one-half interest in lot No. 2, and was so treated by both parties. The consideration paid*1099 or given was different in character, although all the transfers were included in the same instrument. Neither Birdie L. Poncin nor Birdie V. Cline had any interest whatever in the undivided one-half interest in lot No. 2 willed to Claude M. Poncin by his mother, Eliza Poncin, deceased. For the transfer of such one-half interest Claude M. Poncin agreed to and did accept the note of petitioner for $20,000, bearing 6 per cent interest and due in three years.
Inasmuch as the petitioner did not issue any of its stock in payment for Claude M. Poncin's undivided one-half interest in lot No. 2, but acquired it by direct purchase with its $20,000 promissory note, the transaction, in our opinion, does not come within any of the exemptions provided by sections 112 or 113 of the Revenue Act of 1928, as insisted for the petitioner, but the basis for computing gain or loss on this undivided one-half interest when sold by the petitioner is the amount actually paid therefor; viz., $20,000. It is well settled that taxing statutes allowing exemptions are to be construed strictly in favor of the Government and the taxpayer has the burden of proving that he comes within the exemption provision. *1100 ; ; ; ; .
In behalf of the petitioner, it is insisted that when Claude M. Poncin transferred his undivided one-half interest in lot No. 2 to *336 petitioner he did not make an outright sale of the property to a stranger for $20,000, but was transferring the same to a corporation in which he was a stockholder and all the corporation's stockholders were residuary devisees under his father's will. Although Claude M. Poncin may have conveyed his one-half interest in lot No. 2 to petitioner for less than its fair market value, the record indicates it was, nevertheless, a sale. In considering such, it should be borne in mind that the petitioner was an entirely different entity from Claude M. Poncin and the other stockholders therein and the evidence does not show that any of the parties at the time considered the transfer other than as*1101 a sale by Claude M. Poncin and a purchase by the petitioner, and it was so set up on its books.
It is further insisted for the petitioner that the transfer to it of Claude M. Poncin's undivided one-half interest in lot No. 2 increased the assets of the petitioner to the extent of the difference between the fair market value of said interest at the time of the transfer and the price [20,000) paid therefor, and the same should be treated as the equivalent of a donated or paid-in surplus. In support of such insistence, , is cited and apparently chiefly relied on. The facts in that case and the instant case are different. In the Rosenbloom Finance Corp. case, supra, no stock, money, or other property was given for what was transferred to the petitioner by its majority stockholder and a condition of the transfer was that it should constitute paid-in surplus of the corporation, and the corporation in accepting said transfer declared the same to be paid-in surplus. Under such circumstances, it was held that the transfer was not a gift and that the proper basis for computing the gain or loss on the sale of the thing transferred*1102 was the fair market value of such property at the time it was acquired by the petitioner. In the instant case, there was a substantial consideration for the transfer. There was no condition or stipulation that the fair market value, or any part thereof, of the undivided one-half interest in lot No. 2 which was conveyed to petitioner by Claude M. Poncin should be treated as either a gift or paid-in surplus.
In the circumstances of the instant case, as disclosed by the record, it is our opinion that the transfer of the undivided one-half interest of Claude M. Poncin in lot No. 2 to petitioner for $20,000 was a sale to petitioner, though for much less than its value, and as such was properly so treated by the respondent in computing petitioner's deficiency in tax for 1929, and his determination of income tax deficiency for 1929 is approved.
Reviewed by the Board.
Judgment will be entered for the respondent.