*1078 1. Where a corporation pays its debts with stock of another corporation, held, the difference between total amount of debts and cost of such stock is taxable gain.
2. Commissioner's determination of basis for determination of gain or loss upon the discharge of petitioner's debts by the transfer by it of corporate stock of another corporation, and allocation of such basis to three classes of stock received by petitioner in exchange for certain of its assets, approved for lack of evidence disclosing correct basis and proper method of allocation or apportionment of basis.
*347 This is a proceeding for the redetermination of an asserted deficiency in income taxes in the amount of $353.29 for the year 1926.
The following errors on the part of the respondent are assigned by the petitioner:
First: That the Commissioner of Internal Revenue erred in including in the income of petitioner for the year 1926 the sum of $4,616.93, as profit upon the transfer of 104 shares of second preferred stock of the Arrowhead Bridge Company by petitioner to persons*1079 who had rendered services to petitioner in securing certain assets transferred by petitioner to the Arrowhead Bridge Company.
Second: That the Commissioner of Internal Revenue erred in assigning or placing a unit value or price upon the first preferred stock, second preferred stock and common stock of the Arrowhead Bridge Company taken by petitioner upon a transfer of the assets of petitioner to said Arrowhead Bridge Company in exchange for all of the outstanding capital stock of said company.
Third: That the Commissioner of Internal Revenue erred in holding that petitioner made a profit in the transfer of 104 shares of the second preferred stock of the Arrowhead Bridge Company to certain creditors of petitioner in accordance with the plan of reorganization of petitioner.
Fourth: That the Commissioner of Internal Revenue erred in holding that the transfer of 104 shares of second preferred stock of the Arrowhead Bridge Company by petitioner to certain of its creditors constituted a sale thereof at par.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation, with its principal place of business in the City of Superior, and was organized January 13, 1925, for the purpose*1080 of securing a permit or franchise from the Congress of the United States to construct a bridge across the St. Louis River from Grassy Point in Duluth, Minnesota, directly across the river to Billings Park in Superior, Wisconsin. The authorized capital consisted of 500 shares of no par value common stock. The price was fixed at $1 per share and 252 shares were issued and paid for, giving the petitioner a paid-in capital of $252. No other shares have been issued.
In order to finance the construction of the bridge, the Arrowhead Bridge Company (hereinafter referred to as the Arrowhead Company) was organized on February 18, 1926, with an authorized capital of 2,000 shares of 7 per cent first preferred stock and 1,000 shares of 7 per cent second preferred stock, both of the par value of $100 per share, and 10,000 shares of no par value common stock, the price of which was duly fixed at $1 per share. Such price has never been changed.
Through advances of cash and services made and rendered by persons interested in the petitioner it secured on March 2, 1925, the *348 passage of a Congressional act authorizing the construction, maintenance and operation of a bridge and approaches*1081 thereto "across the Saint Louis River at a point suitable to the interests of navigation, from Belknap Street, or within one-half mile north or south thereof, in the city of Superior, Wisconsin, to Le Seur Street, or the vicinity thereof, in the city of Duluth, Minnesota." The act also provides that the Cities of Duluth and Superior could purchase the bridge at any time after its completion, the purchase price to be the reasonable value of the bridge, including approaches, right of way, and accessory works; and that:
* * * In such value the bridge shall be considered as having the license to continue, but such license or franchise right shall not be considered to have a value of exceeding $1,000, and nothing shall be allowed for going concern value.
The City of Superior is to the east of the St. Louis River and the City of Duluth is to the west of it.
At this time Belknap Street in Superior had not been laid out to the site of the bridge. From the bridge site east to the end of Belknap Street, a distance of about half a mile, the land was still used as a pasture and Belknap Street east for about a half mile was not improved and was impassable at certain times. No action had*1082 been taken by the City of Superior or by any private individual to lay out a street down toward the bridge. In September, 1926, the city commissioners passed a resolution to grade Belknap Street for about half a mile from the site of the proposed bridge. The abutting property owners immediately objected, but in October, 1926, they agreed to the opening of the street and to the apportionment of special assessments. On March 1, 1927, a resolution was adopted by the City of Superior authorizing the improvement and graveling of 2,642 feet of Belknap Street at the earliest possible date.
About a mile of swamp land lay between the site of the proposed bridge at Grassy Point on the Duluth side to Le Seur Street. Beyond the swamp were some 15 or 20 railroad tracks which were crossed at grade. On July 29, 1926, the city council of Duluth adopted a resolution authorizing the grading and graveling of a 40-foot roadway on Le Seur Street to the approach of the bridge.
The petitioner secured agreements for the purchase of land on either side of the river for a right of way. On the Duluth side the price of the land was $1,000 an acre for 10 acres and for the right of way on the Superior*1083 side $1,900 for 3.8 acres at $500 per acre. At the time of the transfer of petitioner's assets to the Arrowhead Company about $1,600 had been paid on the land purchased on the Duluth side. The unpaid balance was later paid by the petitioner *349 in cash obtained from the sale of Arrowhead preferred stock. The purchase price of the land on the Superior side was paid for with 19 shares of second preferred stock of Arrowhead Company out of the shares received by petitioner.
At a meeting of the stockholders of the petitioner held on May 28, 1926, all of the stockholders being present, viz., J. B. Finch, holding 250 shares; R. C. Buck, 1 share; and Clarence J. Hartley, 1 share, a resolution in the form of an offer to sell, assign and transfer certain of its assets to the Arrowhead Company was adopted. The resolution recited that the petitioner had secured a permit to construct the bridge from Congress on March 2, 1925; that a general plan of the proposed bridge was prepared and filed with the War Department of the United States; that hearings were had relative thereto and that such plan was approved on November 18, 1925; that such general plan had been modified and approved*1084 as modified on March 25, 1926, by the War Department; that the petitioner had secured title to real estate on the Wisconsin and Minnesota sides of the St. Louis River, and also the riparian rights thereto, to permit the construction of the bridge and connections with public streets in Superior and Duluth; that petitioner had prior to March 2, 1926, commenced construction of the bridge; that the petitioner had secured the performance of very valuable services by attorneys and engineers relative to the foregoing; that the permit, the right of way, preliminary plans, maps, drawings and various rights were "deemed of great value"; and that petitioner was indebted to various persons, including its officers, attorney and engineers in very substantial amounts both for services and disbursements, and that petitioner was desirous of arranging to secure sufficient funds to pay its indebtedness and desirous of selling its franchise, right of way and assets. In such resolution petitioner offers to sell, assign and transfer the franchise to the Arrowhead Company for its second preferred stock at par, the number of shares to be thereafter determined (later determined at 250 shares of second preferred*1085 stock) and the real estate, as described, situated in Duluth, Minnesota, and Superior, Wisconsin, free and clear of all liens and encumbrances, all maps, surveys, sketches, reports of soundings, profiles, preliminary plans and engineering data of every kind and nature, the property of the petitioner, and all memoranda, opinions, reports of investigations of franchise rights, title and riparian rights of every kind and nature, secured or procured by petitioner in connection with the construction of the bridge, also all construction work in connection with the actual construction of the bridge in consideration of the transfer and assignment by the Arrowhead Company to the petitioner of its stock as follows:
| 10,000 shares common stock at $1 per share | $10,000 |
| 200 shares 1st preferred at $100 per share | 20,000 |
| 458 shares 2nd preferred at $100 per share | 45,800 |
| Total | 75,800 |
*350 which stock was to be issued in the name of the petitioner, except one share each of common stock to be issued to Lauren A. Kennedy, Clarence J. Hartley, R. C. Buck, Oscar S. Johnson and J. B. Finch.
In addition to the transfer of the above stock, such resolution provided that the*1086 Arrowhead Company was to assume and pay all of the cost of the actual construction work from on or about February 15, 1926, to date and to take over the work and also to assume and pay to R. C. Buck, Inc., engineers, the amounts due or to become due to it on account of the preparation of detailed plans and specifications and supervision of the construction work.
At a meeting of the stockholders of the Arrowhead Company held May 28, 1926, all of the holders of common stock being present, viz., R. C. Buck, holding 1 share; Lauren A. Kennedy, 1 share; J. B. Finch, 9,996 shares; Clarence J. Hartley, 1 share; and Oscar S. Johnson, 1 share, a resolution was adopted accepting the offer of the petitioner as above outlined. It also adopted a resolution authorizing its officers to proceed with and to complete the construction of the bridge and the financing thereof.
Later the petitioner, by the resolution adopted at the meeting of its stockholders held June 23, 1926, determined that "the reasonable value" of the permit or franchise to construct the bridge be deemed to be $25,000 and authorized its officers to transfer the permit to the Arrowhead Company in consideration of $25,000 of*1087 its second preferred stock at par (250 shares of second preferred stock).
The petitioner transferred its assets to the Arrowhead Company on May 28, 1926, and received in exchange 200 shares of first preferred stock, 708 shares (458 shares plus 250 shares) of second preferred stock, and 10,000 shares of common stock, of which 3,600 shares were later relinquished to Paine, Webber & Company. No stock had been issued by the Arrowhead Company prior to that date.
James B. Finch, who has been president of both the petitioner and Arrowhead Company since their incorporation, and now looks after the operation of the bridge, negotiated with various financing firms for a period of a year or more and finally succeeded in obtaining an agreement with Paine, Webber & Company in the form of a letter addressed to the arrowhead Company under date of April 24, 1926, in which Paine, Webber & Company agreed to sell $250,000 principal amount of first mortgage bonds and $180,000 principal amount of 7 per cent first preferred stock of the Arrowhead Company. The agreement provides in part that a bond conditioned upon *351 the completion of the bridge free and clear of all legal liens and encumbrances*1088 shall be furnished to the trustee named in the trust deed, together with equity moneys in such sums as may be necessary to insure the full completion of the bridge. It also provides that the first preferred stock shall be offered at par and accrued dividends, each share of such stock so offered for sale to be accompanied by 2 shares of common stock of no par value; that Paine, Webber & Company is to receive a commission of 10 per cent of the face amount of the first preferred stock to be sold by it in cash and 9 per cent of the authorized 10,000 shares of common stock; that in the event that less than two shares of common stock be given with each share of first preferred stock, Paine, Webber & Company shall receive for services an additional number of shares of common stock equal to one-half of the difference between the two shares and number of shares actually given as bonus; and that the first preferred stock shall be sold at par, each share of such preferred stock to be accompanied by two shares of common stock as bonus. It also provides that the first preferred stock shall receive cumulative dividends at 7 per cent from January 1, 1927, and shall be callable at 105 and accrued*1089 dividends, and be preferred as to assets in the event of liquidation, in the amount of 105 and accrued dividend, before any payments are made upon prior stock, and shall have exclusive voting rights in the event the dividend of $7 per share accrues and remains unpaid. The agreement further provides that the second preferred stock shall be issued upon terms approved by Paine, Webber & Company.
This agreement was accepted by the Arrowhead Company on May 28, 1926.
Due to the fact that the petitioner and the Arrowhead Company had no funds and were unable to secure a bond or to deposit equity moneys, Paine, Webber & Company waived the provisions relative thereto in its agreement and accepted in lieu thereof as security 350 shares of second preferred and 5,000 shares of common stock of the Arrowhead Company, which shares were transferred by the petitioner out of the stock received by it upon the transfer of its assets. Such stock deposited as security was returned to the petitioner in August, 1927.
The bonds and first preferred stock of the par value of $180,000, including the 1,800 shares of common stock given as bonus, of the Arrowhead Company were sold by Paine, Webber & Company*1090 prior to August, 1927.
In June, 1926, bids were taken by the Arrowhead Company for the construction of the proposed bridge. It was completed and has been in operation as a toll bridge since July 2, 1927.
*352 The first sales of Arrowhead second preferred stock were made in 1928. Twenty shares thereof were sold in 1928 for $60 a share, including accumulated dividends. Later it sold for as high as $80 a share, including accumulated dividends. The dividends on the second preferred stock at the rate of 7 per cent were first paid in 1930.
A 25 per cent dividend was paid on the Arrowhead common stock in April, 1931.
The Arrowhead stock received by petitioner was disposed of as follows:
| Common stock: | |
| 3,600 | shares transferred to Paine, Webber & Co., in 1926; 1,800 shares thereof were used as bonus on the sale of 1,800 shres of 1st preferred Arrowhead stock, and 1,800 shares in payment of commission for sale of stock under finance agreement. |
| 185 | shares transferred as bonus with 185 shares first preferred sold by petitioner in 1926. |
| 300 | shares paid in 1927 in liquidation of indebtedness for promotional services. |
| 5,915 | shares still owned by petitioner. This amount includes the 5,000 shares transferred to Paine, Webber & Co., in lieu of bond under finance agreement, which were returned to petitioner in 1927. |
| 10,000 | Total shares received by petitioner. |
| Second preferred stock: | |
| 104 | shares paid in 1926 to liquidate indebtedness of petitioner; 50 shares of which were paid to Paine, Webber & Co. in payment of services in addition to amount provided for to be paid in finance agreement, 19 shares were paid to Billings Estate Corporation in payment of purchase price of $1,900 of real estate on Superior side of proposed bridge, and the remainder paid to undisclosed creditors for promotional and other services rendered to petitioner. |
| 350 | shares transferred to Paine, Webber & Co. in 1926 in lieu of bond with 5,000 shares of common, which, however, were returned in 1927 to petitioner and by it paid to the following named creditors to whom the petitioner was indebted in the following amounts for "valuable services" rendered by them to it over and above actual cash disbursements made by them, and who were willing to accept payment in second preferred Arrowhead stock at par: |
| J. B. Finch | $15,000 |
| S. A. Buchanan | 2,500 |
| R. C. Buck | 2,500 |
| C. D. Gates | 2,500 |
| Hanitch, Hartley & Johnson | 12,500 |
| 35,000 |
| These services were rendered by petitioner's officers and others employed by it in connection with the drafting and securing of a license and permit from the United States Government, the preparation of surveys, plans and drawings, the securing of title to lands and riparian rights thereto, the approval of plans and drawings, the approval of franchise and permit rights, and other additional and valuable services in connection therewith. The petitioner directed its officers by resolution adopted June 23, 1926 to repay the above named persons the actual cash disbursements made by them as soon as funds were available. | |
| 55 | shares transferred to creditors in 1927 in payment of debts of petitioner. |
| 189 | shares distributed to petitioner's stockholders in 1927. |
| 10 | shares still owned by petitioner. |
| 708 | Total shares received by petitioner. |
| First preferred stock: | |
| 185 | shares sold in 1926 or early in 1927 together with 185 shares of common as bonus at $100 per unit of one share first preferred and one share common, less commission of 10%, the petitioner realizing $90 net on each unit sold. |
| 15 | shares transferred in 1928 to Finch in payment of services. |
| 200 | Total first preferred stock received by petitioner. |
*1092 *353 In the determination of the asserted deficiency the respondent made the following apportionment of cost to the various classes of stock:
During 1926, the corporation acquired securities of the Arrowhead Bridge Company in consideration of the $63,569.37 expended for easements, legal services, etc. These securities consisted of 200 shares First Preferred, 708 shares Second Preferred and 6,400 shares of Common.
In allocating the cost to the various classes of stock, the First Preferred, with one share of common for each share thereof, was considered as being worth 90. The common, being at the date of the acquisition, highly speculative, was entered on the books at $1.00. This leaves a value of $89.00 for the First Preferred.
| Cost of Stock Acquired | $63,569.37 | |
| Less: 200 First Preferred at $89 | $17,800 | |
| 6,400 Common at $1.00 | 6,400 | |
| 24,200.00 | ||
| Balance remaining for 708 shares of Second Pref. | 39,369.37 | |
| Average cost of Second Preferred $55.6065. |
In such determination the Commissioner included no profit as arising from the sale of the 185 shares of Arrowhead first preferred stock, together with 185 shares of common stock as a bonus, treating*1093 the transaction as follows:
| Sale price ( $100 per unit, less 10% commission) | $16,650 |
| Cost (185 shares 1st preferred at $89; 185 shares common at $1) | 16,650 |
| Profit | None |
OPINION.
MCMAHON: The petitioner, in order to further the enterprise in which it was interested, caused the organization of the Arrowhead *354 Company in February, 1926, to carry out the contemplated project. For this purpose the petitioner conveyed or transferred certain of its assets to the Arrowhead Company, receiving in payment therefor in May, 1926, stock of the Arrowhead Company as follows: 200 shares of first preferred stock, 708 shares of second preferred stock, both of the par value of $100 per share, and 6,400 shares of common stock of no par value, the price of which was fixed at $1 per share. This transaction was conceded by respondent to be nontaxable and it is not involved herein except as it may affect the basis to be used for the purpose of determining gain or loss in the transaction which is involved herein.
During 1926 the petitioner transferred to a number of its creditors 104 shares of Arrowhead second preferred stock of a total par value of $10,400, in payment*1094 of services or property in the total sum of $10,400. This is the transaction involved in this proceeding. The respondent contends that the difference between $10,400, the total amount of debts paid, and the cost to petitioner of the 104 shares of Arrowhead second preferred stock is taxable gain.
The petitioner contends that the respondent erred in treating the transaction as a sale of the 104 shares of Arrowhead second preferred stock at par; that the Arrowhead stock has no market or determinable value; and that the respondent erred in fixing a unit cost price for the various classes of stock. It contends that the transaction was nothing more than an exchange of two things of doubtful value; that no fair apportionment of the cost price or of the value of the various classes of stock could possibly be made; and that consequently petitioner is entitled to charge the entire cost of the assets against stock received until the cost is extinguished, and cites in particular article 1567 of Regulations 62, which is in part as follows:
* * * If property is exchanged for two kinds of property and no gain or loss is recognized under articles 1564 and 1566 the cost of the original property*1095 should be apportioned, if possible, between the two kinds of property received in exchange for the purpose of determining gain or loss upon subsequent sale. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until out of the proceeds of sale shall have been recovered the entire cost of the original property. * * *
The first question to be determined is whether the payment by the petitioner of its debts in the aggregate amount of $10,400 by the transfer of 104 shares of stock of another corporation of the par value of $10,400, acquired by petitioner at less than par, resulted in taxable gain to the petitioner.
Section 213 of the Revenue Act of 1926 defines gross income as including "gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * of whatever kind *355 and in whatever form, or from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever." This section also requires that the amount of such items, *1096 except as otherwise provided, shall be included in the gross income for the taxable year in which received by the taxpayer.
A debt is defined in its general sense as "a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment," ; and is property in the hands of the creditor, . That shares of stock are property is elementary and needs no citation of authority. Under the express terms of the statute, gains, profits, or income derived from "dealings in property" or "from any source whatever" are within the term "gross income."
In , it was held that where a corporation issued its own bonds, for which it received par value, and later in the same year purchased in the open market some of the bonds at less than par, the excess of the issuing price or face value over the purchase price is taxable gain or income for the taxable year, and within the definition of gross income under*1097 section 213(a) of the Revenue Act of 1921, i.e., "gains or profits, and income * * * derived from any source whatever." In distinguishing , the court, in its opinion, states: "But the transaction [involved in the Kerbaugh-Empire case] as a whole was a loss, and the contention was denied. Here there was no shrinkage of assets and the taxpayer made a clear gain. As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct."
In this proceeding we have unsecured debts or accounts payable of the petitioner paid for with stock of another corporation, whereas in the Kirby Lumber Co. case, supra, bonds of the taxpayer were sold for cash at the par value and repurchased for cash at less than par value. In the instant proceeding debts of the aggregate amount of $10,400 were paid with stock of the par value of $10,400 which was acquired at less than par, whereas in the Kirby Lumber Co. case, debts were paid in cash in an amount less than the amount of debts paid; and in the instant proceeding the debts represented property and services received, whereas*1098 in the Kirby Lumber Co. case the debts or bonds represented money received. We do not believe that the differences are material. There is no evidence that such debts were *356 not valid and subsisting obligations of the petitioner. Nor is there any evidence that the debts were compromised or that the creditors intended to forgive or cancel part of such debts without payment therefor.
Another case which we deem in point is . In that case a corporation declared a 50 per cent dividend, to be payable in Liberty Loan bonds. The Liberty bonds, at the time they were paid over to the stockholders in payment of the dividends, had a value in excess of their cost to the corporation. It is there held that the transaction resulted in taxable gain to the corporation. We stated in part:
The resolution provided that a 50 per cent dividend be declared. A 50 per cent dividend is a definite amount. It created an obligation of the corporation to its stockholders. Then when that obligation was satisfied by the distribution of the Liberty Bonds owned by the petitioner, we have a realization of a gain through disposition*1099 thereof. When the dividend of 50 per cent was declared the corporation could not satisfy the legal demands of the stockholders by delivering to them bonds less than that value. The corporation discharged its obligation to its stockholders by giving them the bonds which here had a value in excess of the cost. We think that this is a realization of gain in every substantial sense of the word. * * * [Italics supplied.]
See also , where it was held that a similar disposition of property by a corporation resulted in a deductible loss to a corporation.
, in which , was affirmed, has not been overlooked; it is distinguishable.
Assuming that the petitioner had paid all its debts incurred in acquiring the assets transferred to the Arrowhead Company, which, as determined by the respondent, totaled $63,569.37, with Arrowhead second preferred stock at par, it is apparent that it would not have been necessary to use all of the 708 shares of such stock, the par value of which was $70,800, and in addition*1100 it would also have the 200 shares of Arrowhead first preferred stock and 6,400 shares of common. It appears from the records that some debts, including cash advancements to petitioner and the purchase price of the real estate in Duluth, were paid with cash out of the $16,650 cash received from the sale of Arrowhead stock. In 1927 claims aggregating $35,000 were paid with Arrowhead second preferred stock at par. The debts thus paid with such second preferred stock at par and cash total $62,050, leaving $1,519.37 unpaid. However, it further appears that 300 shares of common, 55 shares of second preferred and 15 shares of first preferred were also used to pay indebtedness, but whether the indebtedness so paid was a part of the original indebtedness *357 or was indebtedness incurred after the transfer of assets to the Arrowhead Company does not appear. However, it does appear that petitioner still owns 5,915 shares of common and ten shares of second preferred and distributed 189 shares of second preferred to its stockholders in 1927. As a result it has at least 5,915 shares of common and 199 shares of second preferred stock, representing "assets previously offset by the" debts*1101 "now extinct."
It is contended that neither company had any funds with which to pay the claims of the creditors of petitioner and neither was able to finance the enterprise. Whether petitioner had funds or not to pay its debts is immaterial. It was not shown to be insolvent and it had Arrowhead stock which was accepted by the creditors at its par value in lieu of cash. As stated in :
The value of a thing is not always and solely to be determined by precise methodical computation based upon cash exchanged therefor; and values are sometimes enhanced by faith in the ultimate future of the thing for which those having such faith are willing to hazard their time, money and effort. * * * Within sound limits, the judgment and expectation of those assuming the risk are elements entering into a determination of value.
In our opinion, the transaction herein involved is not materially different in principle from that involved in , and any resulting gain is therefore taxable. See *1102
In order to determine the gain or loss resulting from the transaction it is necessary to ascertain the proper basis to be used in such determination.
The transaction between the petitioner and the Arrowhead Company was a nontaxable transaction under section 203(b)(3) of the Revenue Act of 1926. The basis to be used under section 204(a)(6) of the Revenue Act of 1926 in the computation of gain or loss from the sale "or other disposition" of stock acquired upon an exchange of property under section 203(b)(3), supra, is "the same as in the case of the property exchanged." It is therefore necessary to determine the cost to the petitioner of the property or assets transferred to the Arrowhead Company, since the basis of the Arrowhead stock acquired by petitioner is the same as the cost to the petitioner of the property conveyed in exchange for such stock.
As heretofore stated, it appears that the respondent, in computing the asserted deficiency, determined that the total amount expended and incurred by the petitioner in connection with the enterprise taken over by the Arrowhead Company amounted to $63,569.37, which he used as*1103 a basis in his computation of the asserted deficiency. The correctness of this amount as representing total liabilities of *358 the petitioner incurred by it in the acquisition of or in connection with the assets transferred to the Arrowhead Company is apparently not questioned by petitioner.
In computing the gain on the transaction here involved, the respondent used as a basis for the common and first preferred the basis which he used in his computation of gain or loss on the sale by petitioner in 1926 of 185 shares of Arrowhead first preferred stock together with 185 shares of common as bonus, at $100 per unit of one preferred and one common, less a commission of $10 per unit. Since the basis used by the respondent and net amount received is the same, no taxable gain resulted. No question with respect to the determination of the respondent as to such transaction is raised by the petitioner.
The respondent allocated the total basis used by him to the three classes of stock as follows:
| 6,400 shares of common at $1 | $6,400.00 |
| 200 shares of first preferred at $89 | 17,800.00 |
| 708 shares of second preferred at $55.6065 | 39,369.37 |
| Total cost | 63,569.37 |
*1104 The assets transferred by petitioner to the Arrowhead Company are described in the corporate minutes in part as permit or franchise, right of way, plans, maps, drawings, various rights, etc., "deemed of great value," and the reasonable value of the permit was fixed at $25,000. J. B. Finch, who devoted considerable time to the enterprise and has been president of both corporations since their incorporation, and who is a principal stockholder and apparently was the person most actively interested in the enterprise, testified that the corporate minutes adduced in evidence correctly state the facts. However, he also testified that at the time the transfer was made the only assets which the petitioner had to convey to the Arrowhead Company consisted of the permit or franchise to build the bridge, contracts for the purchase of land to serve as approaches to the bridge, on one of which less than $2,000 had been paid and nothing on the other, a few piles in the river, and the claims against the petitioner for promotional and other services, all of very little value. This testimony is in conflict with statements in the minutes of petitioner.
With respect to the construction of the bridge, *1105 it is to be noted that the Arrowhead Company assumed and agreed to pay the cost and expenses of the construction work and the engineering services from the commencement of the actual construction work on or about February 15, 1926. The cost of such work and services therefore can not be a part of the liabilities which petitioner was obligated to pay, or a part of the cost of the assets transferred by petitioner.
*359 The petitioner presented no evidence as to the cost to it of the property transferred to the Arrowhead Company or of the total indebtedness incurred in acquiring the assets transferred to such company. At the time the Arrowhead stock was acquired by the petitioner, no allocation of cost as between the various classes of stock was made, at least no evidence to that effect was adduced.
The petitioner presented no evidence disclosing the persons to whom the 104 shares of Arrowhead second preferred stock were transferred or as to the nature or character of the debts paid therewith, except that 19 shares thereof were transferred in payment of the purchase price of $1,900 of the land or right of way on the Superior side of the bridge and 50 shares thereof were*1106 transferred to Paine, Webber & Company in payment of services in addition to the stock to be transferred to them under the finance agreement entered into between that company and the Arrowhead Company. There is no evidence that the creditors agreed or intended to take something of a value less than the full amount or value of their claims. The record merely discloses that the claims totaled $10,400 and that 104 shares of second preferred stock of the par value of $10,400 were paid in liquidation thereof. With respect to the debts paid in 1927 it appears that such creditors were willing to take 350 shares of Arrowhead second preferred stock at par in payment thereof. The first preferred and common were used in obtaining cash, not only to finance the construction of the bridge, but also for the purpose of paying certain of petitioner's obligations, some of which represented cash advancements to the petitioner and part of the purchase price of the Duluth right of way, or real estate. The market value of such stock was fixed in the finance agreement and by actual sales in 1926. No evidence was offered disclosing the terms upon which the second preferred stock was issued. *1107 However, it was used and deposited with Paine, Webber & Company in lieu of a bond, and accepted by creditors of petitioner at par as payment. The fact that such stock was highly speculative does not divest it of all value. ; ; ;
The petitioner offered or suggested no method for determining the cost of the 104 shares of Arrowhead second preferred stock. The burden of proof is upon the petitioner. The determination of the respondent is presumed to be correct. The opinion of J. B. Finch, who was the only witness to testify on behalf of the petitioner, that the assets transferred for the Arrowhead stock had little value; that the claims against the petitioner had no substantial value or were *360 not worth the paper written on unless the bridge was constructed; that it was doubtful whether the creditors could realize anything thereon; that the claims were not worth more than the stock given for them; and that the Arrowhead second preferred*1108 stock had no ascertainable value and was speculative, is not sufficient, under all the facts and circumstances here, to overcome such presumption.
Furthermore, the Board is not absolutely bound by the opinion of a single witness as to value, but must weight that opinion in the light of all of the evidence. .
If the method of computation used by the respondent is questioned, it is incumbent upon the petitioner not only to show that the respondent erred, but also to prove a correct basis and proper method or sufficient facts from which the Board can determine a correct basis or proper method of allocation or computation. ; ; ; ; ; . The petitioner having failed in this respect, the determination of the respondent must be approved.
Reviewed by the Board.
Judgment will be entered for the respondent.
BLACK concurs*1109 in the result.