*868 1. The trustees of the residuary estate of the decedent, pursuant to power granted in his will, organized a corporation to promote the property interests of the estate. The estate acquired all of the corporation's stock, the proceeds of the sale of which were used by the corporation to pay for coal and timber lands owned jointly by the decedent and a life tenant of the residuary estate. The corporation had a book surplus, but there were differences of opinion among the life tenants and remaindermen as to what proportions of the amount constituted principal and income. Prior to a settlement of the question, a portion of the surplus was used to redeem stock. Held, that the distribution was not essentially equivalent to the distribution of a taxable dividend.
2. Loss alleged to have been sustained in the transaction disallowed in the absence of proof of the cost of the stock.
*926 This proceeding was instituted for the redetermination of a deficiency of $9,054.23 in income tax for 1931. The issues are*869 whether the amount of $80,000 received by the petitioners in redemption of 800 shares of common stock of the Cotiga Development Co. should be treated as essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928, and, if not, whether the petitioners sustained a loss of $4,016 in connection with the disposition of the stock.
FINDINGS OF FACT.
The petitioners are the administrators d.b.n.c.t.a. of the estate of Stuart Wood, who died March 2, 1914, leaving his residuary estate to trustees, in trust, with directions for the distribution of the net income to three individuals for life, and upon their death to distribute the corpus to named persons and their heirs. Among the real property the decedent bequeathed to the trustees were about 40,000 acres of coal and timber lands in West Virginia, which he owned jointly with his brother, Walter Wood, one of the life beneficiaries of the net income of the decedent's residuary estate.
In February 1925, as the result of a partition suit brought by the executors against Walter Wood, the land was sold under the direction of the court to the Cotiga Development Co., a Delaware*870 corporation, for $1,618,000. The buyer was organized by the trustees in January 1925 with a capital consisting of 20,000 shares of common *927 stock, par value $100 each, pursuant to a provision of decedent's will giving the trustees power to organize or promote a corporation for the purpose of protecting or making more available the decedent's property interests.
In 1925 and 1926 the estate purchased 13,248 shares of common stock of the Cotiga Development Co., as follows:
| Date of acquisition | Consideration | Shares |
| January 13, 1925 | $1,000 cash | 10 |
| January 31, 1925 | Cash and securities | 6,807 |
| January 31, 1925 | Cash and securities | 183 |
| April 1, 1925 | Not shown | 5,048 |
| December 7, 1925 | Land | 400 |
| January 30, 1926 | $40,000 cash | 400 |
| January 30, 1926 | $40,000 cash | 400 |
The land conveyed for the stock acquired on December 7, 1925, was appraised by appraisers for the estate at a value of $25,000 as of the date of the decedent's death.
The estate was the sole stockholder of the Cotiga Development Co. until 1933. The Cotiga Development Co. used the money it received from the estate for stock to pay for the West Virginia land.
The books of the Cotiga*871 Development Co. disclose a surplus of $467,386.44 on December 31, 1930, computed as follows:
| Receipts | ||
| Royalties on coal | $576,792.47 | |
| Sales of timber | 364,308.82 | |
| Oil and gas leases | 148,685.84 | |
| Miscellaneous rents | 2,817.14 | |
| Miscellaneous sales | 428.76 | |
| Haulage | 6,615.59 | |
| Profit on securities | 129.60 | |
| Income from securities | 15,407.73 | |
| 1,115,185.95 | ||
| Deductions | ||
| Bad debts | $7,744.25 | |
| Taxes | 244,680.80 | |
| Salaries and agent's expenses | 58,698.90 | |
| Right-of-way for timber | 1,449.62 | |
| Labor | 13,643.71 | |
| Legal expenses | 11,560.73 | |
| Surveying and Eng | 5,116.22 | |
| Traveling expenses | 14,408.31 | |
| Office expenses | 5,242.60 | |
| Organization expenses | 575.45 | |
| Commissions | 177.80 | |
| Miscellaneous expenses | 1,807.92 | |
| Interest | 56,113.72 | |
| $421,220.03 | ||
| Profit before depletion | 693,965.92 | |
| Reserve for depletion: | ||
| Timber | $119,598.12 | |
| Coal | 106,981.36 | |
| 226,579.48 | ||
| Surplus | 467,386.44 |
*928 The corporation had $121,526.86 cash on hand January 1, 1931. It paid no cash dividends from 1925 to 1931, inclusive.
Differences of opinion existed between the executors and beneficiaries of the estate as to what apportionment the Orphans' Court of*872 Philadelphia, to which the executors were accountable, would make of the corporation's surplus between principal and income. The executors were of the opinion that if they caused the corporation to pay a cash dividend, the life beneficiaries of the net income of the estate would treat the dividend as having been paid out of earnings and insist upon a distribution of the amount to them. With the idea of avoiding claims of remaindermen resulting from a distribution of corpus to life tenants, the executors concluded that pending an audit of the executors' accounts by the Orphans' Court surplus funds of the corporation should be paid to the estate so that the money could earn income distributable to the life beneficiaries. Accordingly, on January 27, 1931, the directors of the Cotiga Development Co. took the following action with respect thereto:
The president reported that the Company had accumulated funds in excess of its present needs. Therefore the purchase from the Estate of Stuart Wood of $80,000 of capital stock of Cotiga Development Company at par; and the investment in bonds of other funds not needed for the foregoing purpose are recommended, the stock and bonds so purchased*873 to be held in the Treasury of the Company.
On motion, duly made, seconded and carried, it was RESOLVED that this Company purchase as of Jan. 27th, 1931, for cash from the Estate of Stuart Wood, dec'd., 800 shares of the capital stock of the Cotiga Development Company at par; and, further, that purchase be made of investment bonds to an amount not exceeding $50,000, which stock and bonds are to be held in the Treasury of the Company; the proper officers being hereby authorized to carry out the above transactions.
On the same day the Cotiga Development Co. acquired 800 shares of its common stock from the estate for $80,000 cash. Of the stock so transferred, the estate had acquired 400 shares on December 7, 1925, and the other half on January 30, 1926. The stock was reissued to the corporation on the date of acquisition by it. The corporation had acquired other shares of its stock from the estate in 1928 and 1929.
In March 1931 the Orphans' Court appointed an auditor to audit the accounts of the executors of the estate. The auditor conducted hearings and considered complaints made by parties in interest, one of which related to the failure of the Cotiga Development Co. to*874 declare dividends from its surplus. Conferences among the representatives of the parties in interest resulted in the execution of an agreement on June 28, 1933, in which they agreed (1) upon a division of the surplus of the Cotiga Development Co. between corpus and *929 income; (2) to increase the outstanding common stock of the corporation by 4,004 shares; (3) that the estate should purchase the additional common stock at par of $400,400; and (4) upon the capitalization of $470,000 of the corporation's surplus and the distribution thereof to the estate as a dividend, payable in special stock bearing 4 percent cumulative dividends redeemable at par, such stock to be distributed by the executors among the life tenants of the estate according to their respective interests. The auditor's report, including the agreement, was approved by the Orphans' Court March 16, 1934, with some modification not important here.
On November 1, 1933, the corporation issued to the estate 4,004 shares of its common stock payable in cash and securities of a value of $400,400, and 4,700 shares of its special stock as a stock dividend. On March 19, 1934, the special stock was distributed among*875 the life beneficiaries of the estate in accordance with a decree of the Orphans' Court. Thereafter, in 1934, the corporation redeemed all of the special stock except 431 shares.
The Cotiga Development Co. is still actively engaged in business.
OPINION.
SEAWELL: The payment of $80,000 made by the corporation to the estate for 800 shares of its common stock was held by the respondent to be taxable to the estate on the ground that the amount constituted a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928, reading in part as follows:
If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *
The petitioners contend that the amount was received in a capital transaction resulting in a deductible loss to*876 the estate of $4,016.
The purpose and principles underlying section 115(g), supra, and corresponding provisions of prior revenue acts are fully set forth in decided cases. See ; affd., ; ; ; affd., ; ; affd., ; certiorari denied, ; .
Questions of this sort in the final analysis must turn upon their peculiar facts. Here there is ample evidence of record to overcome the finding of the respondent. The circumstances surrounding the *930 transaction are free from artifice and the element of tax avoidance is not present.
The Cotiga Development Co. was created by the trustees for the protection of the property interests of the decedent's estate and the stock in question was acquired by the estate to enable the corporation to pay for the West Virginia coal and timber lands. The beneficiaries of the net income of the estate*877 insisted that the corporation's surplus be distributed to them in accordance with the terms of the decedent's will, and the remaindermen contended with equal force that some part of the corporation's surplus constituted corpus and was not distributable to the life tenants of the estate. There were ample grounds for the differences of opinion. The executors concluded that the payment of a cash dividend by the corporation and its distribution to the life tenants of the estate would result in the filing of claims by remaindermen and accordingly refused to make any distribution of the surplus until the rights of the contesting parties could be ruled upon by the Orphans' Court or an agreement with respect to the matter was entered into by the interested parties. In the meantime the advances made to the corporation in the form of stock purchases had served their purpose and part of the surplus funds of the corporation was returned to the estate for stock to earn income which could be distributed to the life tenants without question. Such action was not intended to and did not essentially result in a division of profits of the corporation within the meaning of section 115(g).
The loss*878 of the $4,016 claimed to have been sustained from the redemption of the stock is computed by using as a basis the sum of $105.02 per share. From the opening statement of counsel for petitioners it appears that such amount represents the average cost of the 13,248 shares of the stock acquired in 1925 and 1926 as shown by the books of the estate. Our only concern here is the proper basis for the 800 shares redeemed in 1931.
In his computation of the deficiency the respondent did not find it necessary to determine the basis for the stock in view of his holding that the entire amount represented a taxable dividend. The burden of showing that the estate sustained a loss and the amount thereof was on the petitioners. .
Of the 800 shares of stock redeemed, 400 shares were acquired on January 30, 1926, at par, an amount equal to the redemption price. As to these shares, the estate sustained no loss. As to the remaining shares, the only evidence we have on the proper basis therefor is testimony that the land conveyed in exchange for the stock was appraised by appraisers at a value of $25,000 as of the date of decedent's death. *879 Such testimony, without more, is insufficient to establish *931 fair market value of the land on the basic date. If it could be used for that purpose, there would be gain to tax rather than loss to use for deduction purposes. On this issue we sustain the respondent.
Reviewed by the Board.
Decision will be entered under Rule 50.
LEECH, dissenting: I think the distribution in redemption of stock, upon which that part of the tax deficiency arose involved in the first issue here, occurred at "such time and in such manner" as to make it "essentially equivalent to the distribution of a taxable dividend", and that it was therefore taxable within section 115(g) of the Revenue Act of 1928.
BLACK, STERNHAGEN, and TURNER agree with this dissent.