*2262 1. PROCEDURE IN THE OFFICE OF THE COMMISSIONER. - The petitioner has been accorded full opportunity in a hearing before this Board on the merits; consequently, a complaint with respect to procedure in the office of the Commissioner is of no significance.
2. INCOME FROM CERTAIN SALES FOR A CASH CONSIDERATION, - is determinable to this corporation petitioner for 1922 and 1923 under section 202(a) of the Revenue Act of 1921, and "cost" is held to be the value of the property in 1916 when paid in to the petitioner for its capital stock plus any allowable amounts of additional cost.
3. REDETERMINATION OF DEFICIENCIES. - There is no basis of fact in this case supporting a redetermination upward of the deficiencies.
*1062 This is a proceeding for the redetermination of deficiencies in income tax determined by the respondent in the following amounts: for 1922, $165.08; for 1923, $187.61.
The petitioner contends that (1) a hearing was not granted the petitioner by the respondent prior to the assessment of the*2263 deficiencies; (2) the respondent did not follow T.D. 3921 as embodied in articles 44, 45, and 46 of Regulations 69; (3) the respondent declined to compute the tax on the sales of petitioner's building lots on the basis of their fair market value March 1, 1913, instead of the assumed cost based on the repossession of the property in December, 1916, contrary to the provisions of article 45 of Regulations 69; (4) the original sale of the 100-acre tract in 1912 was an installment *1063 sale as defined by article 45, Regulations 69; (5) in said installment sale, where less than one-fourth of the purchase price was paid in the first year, the proper basis of subsequent taxation was the original basis at the time of the installment sale (April, 1912); (6) a few hundred dollars spent in laying out and grading streets in the 100-acre subdivision of building lots did not constitute such improvements to the property as to take it out of the application of article 45, Regulations 69, as an installment sale; (7) the sales should not be taxed as laid down in article 46, applying to sales of real estate not on the installment plan, but as provided in article 45, applying to sales*2264 on the installment plan; (8) on the theory of taxation adopted by the respondent the petitioner should be allowed as part of its cost of the property: (a) its loss by fire of a dwelling, $6,560.50; (b) its reduction of 6 1/2 acres in area, or in amount, $5,974.50; (c) its depreciation in loss of front footage of lots by bad plotting amounting to 3,214 feet of loss or a reduction of 12 1/2 per cent of the possible frontage, amounting at 12 1/2 per cent of the sale price, to $7,137.50.
At the close of the hearing the respondent moved to increase the deficiencies to conform to the proof of value of the property when turned in to the petitioner for stock.
FINDINGS OF FACT.
The petitioner is a Missouri corporation with its principal office at St. Louis.
A tract of land 100 acres in area, located in St. Louis County, a short distance outside of the city limits of St. Louis, comprising the Mead Homestead, was sold in 1912 by the Mead heirs to two real estate operators, Frank M. Crutcher and Albert W. Oliber, for a consideration of $57,500, upon terms of no cash payment down, and with provision for deferred payments evidenced by negotiable promissory notes covering the principal, *2265 payable and in the amounts as follows: on or before November 30, 1912, $5,000; on or before November 30, 1913, $10,000; on or before November 30, 1914, $15,000; on or before November 30, 1915, $27,500, together with separate notes covering interest at the rate of 6 per cent per annum upon the principal, payable annually. The promised payments were secured by deed of trust, which provided, among other things, that when one of the notes, whether for interest or for principal, having become due and payable, should remain unpaid, then all of the consideration should, at the option of the holder of the notes, become due and payable at once. It was further provided that the vendors would release any of the lots upon the payment of such amounts as the parties might agree upon from time to time. The real estate operators caused to *1064 be organized and incorporated the Oliver-Crutcher Realty Co. for the purpose of taking over the property, subdividing and improving it, and offering the lots for sale to the public. On March 1, 1913, the Realty Co. held title to the property subject to the deed of trust, and the fair market value of the property on this date was $57,500. The asking*2266 prices for the several lots into which the property had been subdivided aggregated an amount largely in excess of this fair market value. The Realty Co., at a cost of $250, caused the areas set aside for public streets to be graded slightly so that they would be distinguishable to prospective purchasers. The lots were laid out to a uniform depth of 159 feet. The lots varied in size from the minimum frontage of 38 feet to wider lots, each containing a total area of one acre. The Realty Co. succeeded in making some 15 sales, ranging from one lot to several lots, and in various locations throughout the subdivision, amounting in the aggregate to an area of 6 1/2 acres and to a consideration of $5,974.50. These lots were released by the Mead heirs as provided in the deed of trust. The real estate market grew dull, worse in 1914, was not much better in 1915, and was very little better in 1916. In 1916 Crutcher and Oliver admitted their inability to meet the promised payments, and they agreed to relinquish all claims to the property in order to avoid public proceedings for foreclosure. They were indebted in the amounts of $51,525.50 unpaid consideration for the land and $13,947.51*2267 interest due and unpaid. In addition, the Mead heirs found taxes due and unpaid on the property in the amount of $2,550.15, which they paid in order to clear the property. The Mead heirs were nonresidents and they deemed it expedient to cause the petitioner to be organized and incorporated late in 1916 for the purpose of taking title to the land and of disposing of it by sale to the public. Accordingly, the Realty Co. deeded 93 1/2 acres of the land to the petitioner on December 16, 1916, for a nominal consideration. On the day of the transfer the fair market value of the land transferred to the petitioner was $68,023.16. The entire authorized capital stock of the petitioner, $50,000 par value, was issued, in consideration of the land, to the five Mead heirs in equal shares of 20 per cent thereof; the five stockholders thus resulting being Bertha E. Mead, Belle Mead, James J. Mead, Nellie Mead Strand, and Mollie Mead Spear.
While the property was in the hands of the Realty Co. the old Mead family residence was destroyed by fire. Insurance in the amount of $3,439.50 was collected by the Mead heirs.
In the deficiency letter the respondent advised the petitioner as follows:
*2268 Due consideration has been given your protest with respect to the computation of the cost of lots. Inasmuch as your corporation paid for the improvements on the property when reacquired in 1916, it is held that the cost at *1065 this date should be taken as the basis in determining profit. This is in accordance with Solicitors' Recommendation 7359, page 112, Cumulative Bulletin IV-2.
In determining the deficiencies the respondent has computed net income as follows:
| 1922 | 1923 | |||
| Collections | Profit | Collection | Profit | |
| Profit from installment sales. | ||||
| 1917 sales, rate of profit, | ||||
| 34.238 per cent | $82.00 | $28.08 | $45.80 | $15.68 |
| 1919 sales, rate of profit, | ||||
| 33.009 per cent | 781.00 | 257.80 | 682.50 | 222.53 |
| 1920 sales, rate of profit | ||||
| 35.149 per cent | 7,612.00 | 2,675.54 | 9,692.00 | 3,406.64 |
| 1921 sales, rate of profit | ||||
| 49.647 per cent | 100.50 | 49.90 | 893.50 | 443.60 |
| 1922 sales, rate of profit | ||||
| 56.395 per cent | 286.25 | 161.43 | 1,115.30 | 628.97 |
| 1923 sales, rate of profit | ||||
| 54.881 per cent | 146.00 | 80.12 | ||
| Gross profit on collections | 3,172.75 | 4,797.54 | ||
| Profit from cash sales | 385.12 | |||
| Forfeiture on Fenton sale | 7.66 | |||
| Forfeiture on Lampe Brothers | ||||
| contract Interest reported on | ||||
| return | 1,758.03 | 2,458.92 | ||
| Total gross income | 5,323.56 | 7,267.63 | ||
| Loss expenses shown on return | 1,221.85 | 1,439.96 | ||
| Net income | 4,101.71 | 5,827.67 |
*2269 OPINION.
TRUSSELL: The petitioner offers eight contentions, but it appears at once upon examination of the record that they relate to but three major issues, which may be summarized as follows: (1) Raised in contention No. 1: petitioner was not accorded a hearing by the Commissioner prior to the assessment of the deficiencies; (2) raised in various details in contentions No. 2 to No. 7, inclusive: the basis for the computation of the profits derived by the petitioner from sales of lots in a certain subdivision should be that of the prior owners who turned the land over to the petitioner for capital stock; (3) raised in contention No. 8: in the alternative, if the basis used by the respondent is approved in principle, then it should be increased in amount by three certain items of claimed expense or loss.
In the first issue the petitioner complains of a failure to accord the petitioner a hearing before the Commissioner in Washington following upon a hearing before the revenue agent in the field. The petitioner was voluntarily filed within the statutory 60-day period, and the petitioner has been accorded full opportunity at a hearing before this Board on the merits. No mention*2270 of this issue is made in the brief filed on behalf of the petitioner, and we are not informed of the significance of the allegation. On the face of the petitioner it would appear that the complaint is addressed to some matter of office procedure with which we have nothing to do.
*1066 In the second issue the major point involved is the contention of the petitioner that by reason of a chain of transactions involving the title to a certain tract of land, and culminating in the transfer of the land to the petitioner in exchange for the capital stock of the petitioner, all as detailed in the findings, it follows that the profit to the petitioner in the taxable years derived from sales of parcels of the land should be computed for income-tax purposes upon the basis which would have been allowable to the transferors.
The petitioner cites the provisions of the Revenue Act of 1921, reading as follows:
SEC. 202. (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received*2271 in exchange has a readily realizable market value, no gain or loss shall be recognized -
* * *
(3) When (A) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
* * *
(d) (1) Where property is exchanged for other property and no gain or loss is recognized under the provisions of subdivision (c), the property received shall, for the purposes of this section, be treated as taking the place of the property exchanged therefor, except as provided in subdivision (e); * * *
The petitioner interprets these provisions*2272 to mean that no profit or loss is to be recognized in the transfer of the land to the petitioner for its stock; consequently, the land while in the hands of the petitioner takes the basis properly allowable for income-tax purposes to the transferors provious to the transfer.
The position of the respondent is that the petitioner is a separate entity organized and incorporated in 1916, at which time it acquired the property here under consideration, and, in consequence, under the Revenue Act of 1921 it can not go beyond 1916 to arrive at a basis for taxation.
In the brief filed on behalf of the petitioner it is admitted that this position is not understood, and indeed this is readily apparent. The petitioner mistakes the applicable statutory provisions. The transactions here under consideration are the sales by the petitioner for considerations payable in cash (it matters not whether all paid *1067 down or through an agreed schedule of deferred payments), and the pertinent provision of the Revenue Act is as follows:
SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal or mixed, acquired*2273 after February 28, 1913, shall be the cost of such property.
We know of no authority under the Revenue Act of 1921 which, under the facts in this case, authorizes a disregard of the separate entity of the corporation, or is retroactive to 1916 by implication, resulting in the use of the basis of the transferor and the disregard of the profit or the loss recognizable in the exchange under section 2 of the Revenue Act of 1916. The provision of the 1924 Revenue Act, section 204(a)(8), which does provide such an authorization is not retroactive with respect to net income of prior years. L. H. Philo Corporation,16 B.T.A. 130. The proper basis to this petitioner, under the 1921 Act, is its cost. There is no evidence to show that the petitioner, at the time of acquisition of the land, had other assets, and there is no basis for a claim that the stock it gave for the land was worth any more or any less than the value of the land, consequently the petitioner's original cost must be taken as equaling the value of the land when acquired. *2274 Realty Sales Co.,10 B.T.A. 1217; John Glackner Realty Corporation,11 B.T.A. 151, and the cases cited therein; L. H. Philo Corporation, supra;Seymour Manufacturing Co.,19 B.T.A. 1280, 1285. It follows that we must approve the action of the respondent in basing his computation on the value of the property when paid in, plus any allowable subsequent costs. After careful consideration of all of the evidence touching on the value of the land when acquired by the petitioner, we are satisfied that it amounted to $68,023.16, which, according to the oral statements of counsel at the hearing, equals the amount of the basis recognized by the respondent. Our conclusions render unnecessary a detailed consideration of the various matters raised in contentions No. 2 to No. 7, inclusive, all of which relate to the extremely involved and devious route by which the petitioner desires to lead us to a disregard of intermediate transactions and to a recognition of a basis for the transferors of the value of the land as of March 1, 1913, although on that date the transferors did not hold title to the property, and, furthermore, to*2275 an amount of such value which we think is not satisfactorily supported by the evidence.
In the third issue the petitioner contends, in the alternative, in event that we approve in principle the basis adopted by the respondent, that three certain items should be added to the amount of the basis used by the respondent in his computation.
The first item is an amount of loss claimed by the transferors to have been sustained prior to the transfer of the land to the petitioner *1068 through the destruction by fire of the family dwelling formerly standing upon the land and estimated to be the excess of the fair value of the dwelling over and above the amount of insurance recovered by the transferors.
The second item is the amount of the cash proceeds received by the transferors from purchasers other than the petitioner derived from the sales of 6 1/2 acres of the land prior to the transfer of the remaining 93 1/2 acres to the petitioner.
The third item is an amount of prospective - if you choose, imaginary - loss, which is not shown to have ever been sustained by anyone, attributable to bad management in subdividing the land long prior to its transfer to the petitioner, *2276 resulting in a failure to afford opportunity for the maximum possible aggregate of lot frontage, thus affecting the ultimate realization upon asking prices based on frontage.
We believe it is obviously unnecessary to go into detailed discussion of the items. The first, a loss by fire, and the second, a sale of property, are manifestly transactions with which, in point of fact, the petitioner has nothing whatever to do. The third may have had some effect, downward, however, upon the prospective value of the land when turned over to the petitioner. Certainly there is no basis for calling the prospective failure to derive a maximum profit cost to anyone, be it the transferors or the petitioner.
We conclude that there is no basis in fact or in law for this claim of the petitioner.
Toward the end of the hearing the respondent moved to increase the deficiencies to conform to the facts in evidence. A careful consideration of the record shows that there is no basis of fact before us to support a redetermination upward. The motion is, therefore, denied.
Judgment will be entered pursuant to Rule 50.