*899 BASIS - EXCHANGE FOR STOCK. - Where assets worth about $19,660 were transferred to petitioner for 75 percent of its stock and $1,300 in cash and, pursuant to the same plan, $1,500 in cash was paid by others for 25 percent of the stock, the petitioner's basis for the assets is cost to it of those assets and section 113(a)(8) of the Revenue Act of 1932 does not apply.
*1137 The Commissioner determined deficiencies in the petitioner's income and excess profits taxes for the taxable years ended June 30, 1934, and June 30, 1935, as follows:
| Year ended June 30 - | Excess profits tax | Income tax |
| 1934 | $548.66 | $2,136.16 |
| 1935 | 438.16 |
The principal question for decision is whether or not the transaction whereby Florence E. Cohen transferred certain property *1138 to the petitioner in exchange for 45 shares of the petitioner's stock and cash was a transfer within the meaning of section 112(b)(5) of the Revenue Acts of 1932 and 1934 for the purpose of determining whether the basis of the property to the petitioner was the cost*900 of the property to the transferor under section 113(a)(8) or the cost of the property to the petitioner. If the latter basis is to be used, then its amount must also be determined. Another question is whether or not the petitioner is entitled to deduct from its gross income for the year ended June 30, 1934, attorneys' fees of $500 assumed and paid by it for legal services rendered to Florence E. Cohen in connection with the purchase by her of the property transferred by her to the petitioner. The only other issue raised by the pleadings was abandoned at the hearing.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation, organized on June 21, 1933, for the purpose of conducting a retail jewelry and optical business. It filed income tax returns for the periods here involved with the collector of internal revenue for the first district of Pennsylvania.
A retail jewelry business, principally on the installment sales plan, had been conducted at 533 Market Street, Chester, Pennsylvania, for a number of years by members of the Cohen family, first as a partnership and later as a corporation. The latter was adjudicated a bankrupt in May 1933, but the business at the Chester*901 store continued without interruption.
The Chester store in April 1933, when the involuntary petition in bankruptcy was filed, had on its books approximately 1,900 installment sales accounts receivable. The total debit balance in those accounts at that time was about $36,000. The total debit balance in accounts upon which a payment had been received within 90 days of that date was $20,753.52. The total debit balance in accounts upon which a payment had been received within 180 days of that date was $1,536.88. The remaining accounts were worth less than $10 at that time. The total cost of the merchandise in the Chester store at that time was $8,096.69. That merchandise was new. Furniture, fixtures, and equipment in the store were modern and in good condition.
The personal property in the store at the time of the bankruptcy was appraised for the purposes of the bankruptcy proceeding at $1,700 for the accounts receivable, and $2,211.10 for the merchandise, furniture, and fixtures. All of the assets of that store, consisting of accounts receivable, merchandise, furniture, fixtures, records, and good will were offered at public sale by the receiver in May 1933. The sale was*902 well *1139 attended. Bids for all of the assets had reached approximately $9,000 and bidding was still in progress when those attending the sale learned that Anthony Cohen had obtained an option to lease the premises where the store was located. No other suitable store location was available in the vicinity and for that reason the bids were withdrawn and the sale was adjourned to a later date.
Anthony Cohen had obtained the option to lease the premises on behalf of his wife, Florence E. Cohen. A second sale was held early in June at which the assets were sold to Florence, the highest bidder, for $6,800. The assets were transferred to her by a bill of sale dated June 14, 1933. Since the business of the store had continued without interruption, an adjustment had to be made for payments received upon accounts receivable and for merchandise during the period of the bankruptcy. Florence paid $5,363.55 in cash for the assets. The difference between that amount and the bid price of $6,800 represented the net earnings of the store during the bankruptcy.
The purchase of the assets had cost Florence more than she felt she was able to invest and, therefore, she entered into*903 an agreement with her mother, Anne Goldberg, and her brother-in-law, Morris Polish, whereby all agreed that they would form the petitioner corporation, Florence would transfer the assets of the Chester store to the petitioner in exchange for 45 shares of its stock and $1,300 in cash, Anne would pay $1,000 to the petitioner in exchange for 10 shares of its stock, and Polish would pay $500 to the petitioner in exchange for 5 shares of its stock. This plan was carried out. The assets and the lease for the premises were transferred to the petitioner on June 22, 1933, at which time Florence received 45 shares of the stock of the petitioner. Certificates for 10 and 5 shares, dated the following day, were issued to Anne Goldberg and Morris Polish, and they have since been the owners of those shares. They paid $1,500 in cash for the shares on July 12, 1933, after obtaining their funds from savings accounts which required notice. The $1,300 was paid to Florence on July 17, 1933.
The assets were set up on the books of the petitioner as follows:
| Accounts receivable | $25,466.05 |
| Merchandise inventory | 7,281.67 |
| Furniture and fixtures | 3,500.00 |
The evidence does not show*904 accurately the face value of accounts receivable or the cost of merchandise transferred to the petitioner.
The fair market value of the accounts receivable at the time they were transferred to the petitioner was $14,000. The fair market value of the merchandise at the time it was transferred to the petitioner was $5,000. The fair market value of the furniture and fixtures at the time they were transferred to the petitioner was $460.29.
*1140 The petitioner paid attorneys' fees of $500 for legal services rendered to Florence in connection with the purchase of the assets. It claimed a deduction of that amount on its income tax reutn for the fiscal year ended June 30, 1934. The Commissioner held that the amount was organization expense and disallowed the deduction.
The Commissioner determined that the accounts receivable transferred to the petitioner had cost Florence $4,668.80 and that $10,221.31 of the amount realized from the liquidation of those accounts during the fiscal year ended June 30, 1934, was income and $2,203.97 of the amount realized through the liquidation of those accounts during the fiscal year ended June 30, 1935, was income. He determined that*905 the merchandise transferred to the petitioner had cost Florence $2,234.46, $2,791.50 of the amount realized in the fiscal year ended June 30, 1934, from the sale of that merchandise was income, and $454.46 realized from the sale of that merchandise during the fiscal year ended June 30, 1935, was income. He also determined that the furniture and fixtures transferred to the petitioner had cost Florence $460.29 and allowed depreciation based upon that cost. He explained that the petitioner's basis for gain or loss and for depreciation on the assets acquired from Florence was the cost of the assets to Florence, since immediately after the transfer she controlled the corporation through the ownership of 45 shares.
OPINION.
MURDOCK: Section 112(b)(5) of the Revenue Act of 1932 provided that no gain or loss should be recognized if property was transferred to a corporation solely in exchange for stock of the corporation and immediately after the exchange the transferor was in control of the corporation, but if there were two or more transferors, the paragraph was to apply only if the amount of stock received by each was substantially in proportion to his interest in the property prior*906 to the exchange. Section 112(c)(1) of that act provided that if an exchange would be within the provisions of (b)(5), save for the fact that money was received in addition to stock of the corporation, then the gain should be recognized, but in an amount not in excess of the money received. Section 113(a)(8) provided for the retention of the old basis where (b)(5) applies. The Commissioner has apparently determined the petitioner's bases under those provisions, although it is not clear how he arrived at the total basis of $7,363.55. He has regarded the payment of the cash by Anne and Polish as a separate transaction. He erred in so doing. The word property used in section 112(b)(5) includes money. ; ; ; Columbia*1141 . Florence, Anne, and Polish transferred property to the petitioner in exchange for all of its stock. The transfer of property by Florence and the purchase of stock for cash by Anne and Polish were parts of a single plan. The control mentioned*907 in the statute is determined at the completion of all of the inseparable steps in that plan. ; affd., ; certiorari denied, . Florence was not in control of the petitioner within the meaning of section 112(b)(5).
However, Florence, Anne, and Polish, who transferred property to the petitioner in exchange for all of its stock, were in control of the petitioner immediately after the transfer. The respondent did not determine that the stock received by those three people was substantially in proportion to their interests in the property prior to the exchange and makes no such argument now. Furthermore, it is apparent that the value of the share of each transferor in the total assets before the exchange is not substantially in proportion to the amount of stock received by him. Cf. ;. The petitioner received $1,500 in cash and about $19,460 worth of assets and paid out $1,300 in cash, so that the net value of its assets was about $19,660. Florence, who contributed over 92 percent*908 of that property, received only 75 percent of the stock, whereas Anne and Polish, who contributed less than 8 percent of the property, received 25 percent of the stock. Section 112(b)(5) has no application whatsoever. It is not suggested that there is any other provision of the statute which would require the petitioner to take as its basis for the property transferred to it the same basis which the property had in the hands of Florence. The petitioner's basis is the cost of the property to it.
The petitioner paid for the property with 45 shares of its own stock and $1,300 in cash. Thus, the cost of those assets was $16,045 (45 shares, or 75 percent of its own stock, would be worth 75 percent of $19,660, the total value of its assets, or $14,745). A proper allocation of that cost under the facts of this case is as follows: To accounts receivable, $11,376.84; to merchandise, $4,207.87; to furniture and fixtures, $460.29.
The Commissioner did not make a determination of the fair market value of the assets at the time they were transferred to the petitioner. The evidence in the case shows clearly that Florence purchased those assets at much less than their true value. Witnesses, *909 familiar with the value of accounts receivable and merchandise similar to these, testified that the accounts receivable upon which recent payments had been made were worth a large percentage of face value and the merchandise was worth from 90 to 100 percent of its cost. There *1142 was no opinion evidence of the value of the furniture and fixtures. There is other evidence, however, which tends to show that the values of the accounts receivable and the merchandise were less than the percentages stated by the witnesses. Some of that evidence as, for example, the bankruptcy appraisal, is not entitled to much weight. The bankruptcy sale was rather inconclusive as to value. The circumstances of the formation of the petitioner in connection with which Florence turned in the assets for 45 shares, whereas $1,500 in cash was paid for the remaining 15 shares is not determinative. Cf. . The business done by the store during the bankruptcy proceeding is also evidence. Nor may we overlook the fact that the exact amount of accounts receivable and merchandise transferred to the petitioner is not shown. We have endeavored to fix a value*910 from all of the evidence, after giving due weight to the various kinds of evidence. Subsequent events give some corroboration to the values which we have determined. Others might fix the values differently, but we have determined values which we think the evidence warrants.
The legal fee is not deductible under section 23(a) of the Revenue Act of 1932. The services were rendered in connection with the acquisition of title to the property. Such expenditures are capital expenditures and are not deductible from income. .
Decision will be entered under Rule 50.