*747 1. The jurisdiction of the Board is not limited to the correctness of the theory upon which the deficiency was determined, but includes the correctness of the determination of the deficiency upon any proper theory. Gowran v. Commissioner, 87 Fed.(2d) 125, and cases cited therein.
2. Under a contract between a partnership, composed of petitioners, and a group, composed of secured partnership creditors, the purpose of which was to continue the loans of such creditors in the then business of the partnership, a corporation was organized to which the partnership transferred its property in exchange for 9,698 shares of stock out of 10,000 shares issued. Under the same contract and as a part of the one transaction, immediately prior to that transfer the group released their obligations and equitable title to the partnership property, securing such obligations, and received from the corporation bonds and short term notes in the sum of those obligations, and 2,000 shares of stock in the corporation from the partnership. Held:
(1) The transaction must be viewed as an entirety. When so considered, the partnership exchanged property to a corporation for 7,698*748 of its 10,000 issued shares of stock. And the group constructively exchanged money in the amount of its released obligations against the partnership for bonds, notes, and 2,000 shares of stock of the corporation. Halliburton v. Commissioner, 78 Fed.(2d) 265; Hazeltine Corporation v. Commissioner, 89 Fed.(2d) 513; Claude Neon Lights, Inc.,35 B.T.A. 424">35 B.T.A. 424, followed.
(2) Since the fair market value of the stock and the securities received by the partnership and the group was not substantially proportionate to such value of their respective interests prior to the exchange, the transaction was one in which gain or loss was recognizable. Revenue Act of 1928, sec. 112(b)(5). United Carbon Co. v. Commissioner, 90 Fed.(2d) 43, followed.
(3) The partnership then sustained a deductible loss measured by the difference between the cost of the property exchanged and the fair market value of 7,698 shares of stock received by them in exchange therefor. Revenue Act of 1928, sec. 111(a) and (c) and sec. 113(a).
*232 These consolidated proceedings involve the redetermination of deficiencies in income taxes and penalties for the calendar year 1929 in the amount of $1,707.03 tax and $426.76 penalty, in each case.
The error assigned in both proceedings is that the respondent erred in disallowing as a deduction, for that year, from income of a partnership, consisting of the two petitioners, the amount of $202,554, the then value of 2,000 shares of the capital stock of the E. L. Dana Livestock Co. transferred by the petitioners to certain persons in 1929.
From the stipulations and oral testimony, we make the following findings of fact.
FINDINGS OF FACT.
The petitioners, husband and wife, are residents of the State of Wyoming. The petitioners were engaged, as individuals, prior to 1927, in the cattle business. The location of that business was a ranch, located partly in Wyoming and partly in Montana. On account of the drought in 1919 and the deflation in and following 1920, they suffered losses. On September 13, 1924, petitioner E. L. Dana, owning those valuable ranch lands, improved and adapted*750 for the running of cattle, upon which there were then approximately 900 cattle, unable to borrow money from any bank, borrowed $300,000 from a number of eastern people, hereinafter designated the "Ann Arbor Group", consisting of about 100 members, for the purpose of purchasing or acquiring cattle. This loan was secured by a trust on the property of petitioner E. L. Dana in favor of the Ann Arbor Group, which, in addition to creating the relationship of debtor and creditor for the loan between petitioners and the group, provided a life of five years for the trust and that petitioners should pay 6 percent interest for the money or give to the trust one-half the profits of the ranch in lieu of interest. On January 1, 1927, the petitioners entered into a general partnership, which partnership carried out the trust agreement with the Ann Arbor Group with its knowledge and consent.
During 1929, but prior to the expiration of the trust agreement in that year, it was determined that the profits for the five-year period of the trust agreement would exceed $800,000, half of which would be due and payable to the Ann Arbor Group at the expiration of the trust agreement, which sum the partnership, *751 composed of petitioners, would be unable to pay without selling all the cattle owned by the partnership and applying the proceeds thereof in discharge of that indebtedness. Having failed again to secure other financing of this obligation, the partnership, consisting of petitioners, on *233 June 1, 1929, made the following proposal to the "Ann Arbor Group":
The following plan is presented to the Ann Arbor Associates of Mr. E. L. Dana for a continuance of the cattle venture in which you are now engaged.
* * *
At the close of 1928 there was due to the Ann Arbor Associates $543,599.46, this being the sum due after deducting $105,000.00 of the original investment returned to the Associates in the fall of 1928. * * *
If all the cattle are cleaned up in the fall of 1929, there will be an additional profit for the Ann Arbor Associates of another $110,000.00 or thereabouts so that in the fall of 1929 the total due the Ann Arbor Associates will be in the neighborhood of $650,000.00. Of this latter sum $455,000.00 is profit from the venture and $195,000.00 is the remaining capital not returned so that by the fall of 1929 the venture will have produced an earning of 150%. These*752 figures are approximate. I do not think they will vary much if any but I cannot assure them as being final.
It is now proposed to continue this venture indefinitely, the proposal coming as a result of Mr. Dana's desire to remain in business with his Ann Arbor Associates and to deliver to these Associates further profits resulting from the business.
It is proposed to organize a corporation which will use as a part of its corporate name Dana either as the Dana Cattle Company or some such title. This corporation will be of Wyoming and will be incorporated for 10,000 shares of common stock of no par value. To this corporation will be turned the Parkman Ranch consisting of Approximately 25,000 acres. All the feed now on hand or prodeced during 1929, all the equipment now on the property necessary for successful operations and all remaining cattle and horses. The cattle will consist largely of cows and the 1929 calf crop. There will be assigned to this corporation all the leases for the grazing lands of the Crow Reservation. The new corporation will take the property subject to the mortgage indebtedness now existing against the lands and which is approximately $180,000.00.
*753 It is further proposed to pay to the Ann Arbor Associates in cash during the fall of 1929 $195,000.00. This will return to the Ann Arbor Associates all of their original investment and will leave due them $455,000.00. This represents the profit of this venture. The $455,000.00 will be covered by a bond issue of $400,000.00 and $55,000.00 of short time notes. The short time notes at 7% due on or before one year, the $400,000.00 bond issue to be at 7% and to run for ten years but to be retired at the rate of one tenth each year beginning from the second year, these bonds and short time notes to be delivered to the Ann Arbor Associates as their profit from the original investment and in addition with each $100.00 bond Mr. Dana will deliver one-half share of the common stock of the new corporation.
The result of this offer is that the Ann Arbor Associates receive back in money all of their original investment. They receive 7% bonds and short time notes for their profit and as a further profit they receive one-half share of the common stock of the new corporation. * * *
* * *
The proposed corporation will be managed by a board of directors consisting of five, two to be chosen*754 by the Ann Arbor Associates, three to be selected *234 from the West, Mr. Dana being the president and one director. This board of directors will manage the affairs of the corporation through a manager who will reside upon the properties it being Mr. Dana's wish to give up his active management in order that he and Mrs. Dana may ease up from heavy work and reside in Helena, Montana. Mr. Dana has in mind one or two very excellent men to be employed as managers. As president of the corporation Mr. Dana will receive a salary to be determined later by the directors. Mr. Dana will visit the property as often as required with the purpose of laying out the work with the manager and giving the plant a general supervision.
* * *
This proposal was accepted and its terms carried out in substance.
After the creation of the corporation, in 1929, the partnership, in compliance with the foregoing proposal, in writing formally purported to offer to convey the assets of the partnership, including the ranch, all livestock and equipment, to the corporation, the material portion of which follows:
In return for property aforesaid, and as a consideration for the conveyances, assignments, *755 sales and deliveries thereof, the E. L. Dana Livestock Co. shall deliver to me or my nominees, as the case may be,
(1) Nine thousand, six hundred ninety-eight (9698) shares of the nonassessable capital stock of the E. L. Dana Livestock Co., free and clear of any liens or incumbrances.
(2) Expressly assume, agree and covenant to pay the obligations of the undersigned due to the Ann Arbor group of
(a) Three Hundred Forty-nine Thousand, one Hundred Ninety-nine Dollars and Forty-six cents ($349,199.46), accrued profits to December 31, 1928, and
(b) One-half of the profits due to said group for the year 1929, if any, and when determined, by the issuance of Four Hundred Thousand Dollars ($400,000.00) ten-year, seven per cent (7%) bonds of E. L. Dana Livestock Co., secured by due and regular corporate mortgage and deed of trust upon the real property of the corporation in Sheridan County, Wyoming, and Big Horn County, Montana, and
by the issuance of short term seven per cent (7%) notes of the corporation for the balance of 1929 profits, if any are realized.
The fulfillment of said agreement with the Ann Arbor group we expressly stipulate that said trustees shall extinguish and*756 discharge the trust of November 17, 1924, only concurrent with the due execution, acklowledgment, delivery and establishment of the corporate trust deed mentioned.
The corporation purported to accept this offer. The conveyance by the partnership was made. A certificate for 9,698 shares of stock was issued to E. L. Dana and Fra M. Dana, petitioners. A certificate for one qualifying share was issued to Louis P. Hall and Edwin C. Goddard, each. Petitioner E. L. Dana then bought *235 these shares. Both the latter certificates were then canceled, and a certificate or certificates for 2,000 shares were issued to the "Ann Arbor Group", or its members, and two certificates for 3,850 shares each, were issued to petitioners. The other terms of the purported offer were executed.
It is stipulated that:
The total value of the property thus sold and delivered was $1,642,839.67, and the liens and encumbrances against said property assumed by said corporation were in the sum of $661,191.31, and the net value of the property sold and conveyed to the said corporation, and the cost or basis thereof to said co-partners, was $981,648.36, and which properties of said net value petitioner*757 and his co-partner sold and delivered for 9,698 shares of the capital stock of said corporation and which capital stock cost the petitioner and his co-partner $101.22 per share in property and was by said co-partnership parted with as herein set forth.
The entire authorized capital stock of 10,000 shares of the E. L. Dana Livestock Co. was issued.
Of the original $300,000 petitioner E. L. Dana borrowed from the Ann Arbor Group, $105,000 was repaid in cash in 1928, and $195,000 was repaid in cash in 1929.
In 1929, prior to the conveyance of the partnership property to the corporation, the partnership obligations to the Ann Arbor Group and their equitable title to the partnership property, securing those obligations, were released by the group.
The fair market value of the 7,698 shares of stock received by petitioners was then $101.22 per share, or $779,191.56. The fair market value of the 2,000 shares received by the Ann Arbor Group was $202,400 and the bonds and short term notes they received were worth face value.
The purpose of the proposal of the partnership to the Ann Arbor Group in 1929 and the reason for transferring the 2,000 shares of common stock to them was*758 to induce that group to permit its capital to remain in the business so that petitioners might be able to continue in that business, avoid the loss of the property which they had accumulated, and both petitioners and the Ann Arbor Group enjoy profits on their stock in the corporation.
The partnership, consisting of petitioners, filed a partnership return for the year 1929, in which they deducted as a loss, the amount of $202,454, representing the value of the 2,000 shares of stock transferred to the Ann Arbor Group, and, as a result, reported a total loss of $143,743.30 on that return. On auditing this return, the respondent disallowed the asserted loss, determined the distributable income of the partnership was in the amount of $58,710.70, and that one-half of that sum was distributable and therefore taxable *236 to each petitioner as partners. Respondent then prepared an income tax return for 1929 for each petitioner, showing that taxable income, and after determining the present deficiency, imposed a 25 percent penalty upon each for failure to file any return for that year.
OPINION.
LEECH: The Revenue Act of 1928 is controlling.
The question presented is whether*759 the partnership, which consisted of petitioners, was entitled to any deduction from gross income in the computation of its income for 1929 then distributable and taxable to petitioners (sec. 182(a)), 1 by reason of the transfer of 2,000 shares of E. L. Dana Livestock Co. common stock to the Ann Arbor Group.
Both petitioners and respondent take the position that this transfer was an isolated transaction and is to be so treated here. The petitioners then argue it constituted a deductible expense, or loss. They cite ; ; *760 ; Stephen M. Clement, 30; B.T.A. 757; ; . Respondent answers that the transfer was neither, but was a capital expenditure and therefore not deductible. Our jurisdiction is not limited to the soundness of respondent's reasons for his action, but necessarily includes the correctness of that action upon any proper theory. , and cases cited therein.
We do not think this stock transfer was isolated and thus susceptible of such separate and simple treatment.
This stock was transferred to the Ann Arbor Group by petitioners - not by virtue of an independent contract, but in carrying out the specific terms of the very agreement which gave rise to the E. L. Dana Livestock Co. The various steps taken in fulfilling that contract must be viewed as a whole. , and cases cited therein. And, when so considered, the entire transaction constituted an exchange of certain*761 property of petitioners and the Ann Arbor Group, for stock, bonds and short term notes of that newly organized corporation.
*237 It is true the parties have stipulated that:
The total value of the property thus sold and delivered was $1,642,839.67 and the liens and encumbrances against said property assumed by said corporation were in the sum of $661,191.31, and the net value of the property sold and conveyed to the said corporation, and the cost or basis thereof to said co-partners, was $981,648.36, and which properties of said net value petitioner and his co-partner sold and delivered for 9698 shares of the capital stock of said corporation and which capital stock cost the petitioner and his co-partner $101.22 per share in property and was by said co-partnership parted with as herein set forth.
Likewise, they have stipulated that the partnership offered to sell all the property used in the business of the partnership to the E. L. Dana Livestock Co., for 9,698 shares of the capital stock of that company, and other considerations, as set out in the purported offer in the findings of fact, and that this offer was accepted. But this Board is not bound to accept a stipulation*762 of fact as such where the record demonstrates its error. , affirming .
Thus, it is also stipulated that the single contract providing for the creation of the corporation, the acceptance of corporate bonds and short term notes by the Ann Arbor Group for the amounts due them from petitioners under the earlier trust agreement, and petitioners' transfer of their property to the corporation for stock, also provided that the partnership should transfer the disputed stock to the Ann Arbor Group. That stock was undoubtedly given to that group as an additional inducement and consideration to them for what was in effect a purchase of obligations of the new company. In addition, it effectuated one of petitioners' purposes stated in their proposal to the Ann Arbor Group, which, with its acceptance, constituted the contract between that group and petitioners in the execution of the terms of which the corporation was formed. That purpose was that the Ann Arbor Group should continue to share in the "profits" of petitioners' cattle business.
*763 The substance of all these essentially connected steps in the execution of the petitioners' contract with the Ann Arbor Group was that petitioners exchanged their equity in the ranch property, together with certain personal property, for 7,698 shares of stock in the newly organized E. L. Dana Livestock Co. Simultaneously, having released their claims against and equity in the partnership property upon their constructive payment, the Ann Arbor Group, in effect, exchanged their money, in the amount of those obligation, for bonds, short term notes and 2,000 shares of stock in that company. See ; . Whether this concurrent exchange by petitioners and the Ann Arbor Group with the company was one in *238 which gain or loss to petitioners was recognizable, is controlled by section 112(a) and the last provision of (b)(5).2
*764 The Ann Arbor Group received all the bonds and notes of the corporation. They constructively exchanged $455,000 cash for those bonds, notes, and stock having a total fair market value of $657,440. It is immaterial that the Ann Arbor Group received their stock in the corporation, not directly therefrom, but through petitioner E. L. Dana, who was so obligated by the contract.
The petitioners' partnership exchanged property with a fair market value of $981,648.36, for stock then worth $779,191.56. Thus, "the amount of the stock and securities received by each is [not] substantially in proportion to his interest in the property prior to the exchange." .
It follows that the partnership sustained a deductible loss in the amount of the difference between the cost of the property exchanged and that of the stock received therefor. Revenue Act of 1928, secs. 111(a) and (c) 3 and 113(a).4 Since this sum exceeds the contested deficiencies, none such exist. The disputed ad valorem penalties fall with the deficiencies. *765 .
Reviewed by the Board.
Decision will be entered for the petitioners.
Footnotes
1. SEC. 182. TAX OF PARTNERS.
(a) General rule.↩ - There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. If the taxable year of a partner is different from that of the partnership, the amount so included shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year.
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) Exchanges solely in kind. -
* * *
(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - 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. ↩
3. SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
(a) Computation of gain or loss. - Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
(c) Amount realized.↩ - The amount realized from the sale or other disposition of property (other than money) received. (other than money) received.
4. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1913.↩ - The basis for determining gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property * * *.