*1795 In 1925 and 1926 the liquidation was effected of capital stock acquired by petitioner in an exchange in 1923. Under section 202(e) of the Revenue Act of 1921, petitioner was subject to tax in 1923 only on the cash received in the exchange. Held that in computing the gain realized on the liquidation in 1925 and 1926, the basis should be increased only by the amount of cash received in 1923 and not by the value of other property received in the exchange, the latter not being "recognized" gain within the meaning of section 204(a)(6) of the Revenue Act of 1926.
*999 The respondent determined deficiencies in income taxes for the years 1925 and 1926 in the respective amounts of $13,514 and $13,629.85. The issue is whether, in computing gain realized on liquidation of stock which was acquired in an exchange of stock for stock and cash, the basis should be increased by any amount in addition to the cash received in the exchange, the cash alone being subject to tax as income in the year of the exchange.
The facts were stipulated.
FINDINGS OF FACT.
*1796 On February 28, 1913, the petitioner, David B. Gann, acquired for cash in the amount of $300,000 all of the outstanding stock of the Sager Lock Company, a West Virginia corporation. Said stock was represented by 3,000 shares of a par value of $100 each. Said corporation is hereinafter referred to as the West Virginia Company.
*1000 Between February 28, 1913, and July 1, 1920, the petitioner disposed of by gift and sale 1,000 shares of the stock of the West Virginia Company and on July 1, 1920, had remaining 2,000 shares of said stock.
On July 1, 1920, the authorized capital stock of the West Virginia Company was increased from 3,000 shares of a par value of $100 each to 5,000 shares of no par value and 4,500 shares of the no par value stock were then issued to the stockholders in exchange for the old stock upon the basis of one and one-half no par value shares for each par value share then outstanding. Pursuant to said change of capitalization, the petitioner received in exchange for 2,000 shares of par value stock 3,000 new no par value shares.
In August, 1923, a new corporation, also known as the Sager Lock Company, was organized under the laws of Illinois, *1797 with an authorized capital stock of 3,000 shares of 7 per cent cumulative preferred stock of a par value of $100 per share and 3,000 shares of common no par value stock. Said corporation is hereinafter referred to as the Illinois Company. Pursuant to a plan of reorganization, the stockholders of the West Virginia Company, on August 30, 1923, exchanged all of the outstanding stock of said company, totaling 4,500 shares, for all of the authorized capital stock of the Illinois Company and $300,000 in cash. As a result of said reorganization, the petitioner received in exchange for his 3,000 shares of no par value stock of the West Virginia Company, 2,000 shares of the preferred stock and 2,000 shares of the common stock of the Illinois Company and $200,000 in cash. The fair market value on August 30, 1923, of the stock received by the petitioner as a result of this reorganization and exchange was as follows:
| 2,000 shares of preferred stock of the Illinois Company | $200,000.00 |
| 2,000 shares of common stock of the Illinois Company | 233,827.54 |
| Total | 433,827.54 |
As a result of said reorganization and exchange the petitioner realized a gain in the year 1923, determined*1798 in accordance with the provisions of section 202 of the Revenue Act of 1921, as follows:
| Cash received | $200,000.00 |
| Fair market value of stock received | 433,827.54 |
| Total | 633,827.54 |
| Less cost of stock exchanged | 200,000.00 |
| Balance representing total gain computed in accordance with section 202(a) and (b) of the Revenue Act of 1921 | 433,827.54 |
| Portion of total gain in excess of cash received | 233,827.54 |
| Balance representing taxable gain in accordance with section 202(e) of the Revenue Act of 1921 | 200,000.00 |
*1001 The petitioner reported the sum of $200,000 in his income-tax return for 1923 as the amount of taxable gain resulting from said exchange.
This paragraph is without prejudice to the right of the petitioner to contend that the total gain recognized under the Revenue Act of 1921 was $433,827.54 and is without prejudice to the right of the respondent to contend that the total gain recognized under said act was $200,000.
Pursuant to a plan of liquidation, the Illinois Company, on October 1, 1925, redeemed at par its preferred stock, of which the petitioner then held 2,000 shares, and the petitioner thereby received $200,000 in cash.
The petitioner*1799 reported no gain or loss from said liquidation of preferred stock in 1925. The Commissioner determined that a taxable gain was realized from said liquidation in the amount of $107,800, the computation being as follows:
| Market Values of stock of New Corporation | |
| Basic Cost of Stock | $200,000.00 |
| Stock Received in New Corporation: | |
| Preferred 2,000 shares | 200,000.00 |
| Common, 2,000 shares | 233,827.54 |
| Total | 433,827.54 |
The basic cost assignable to the 2,000 shares of preferred stock is $200,000.00/$433,827.54 of $200,000.00 or $92,200.00.
The basic cost assignable to the 2,000 shares of common stock is $233,827.54/$433,827.54 of $200,000.00 or $107,800.00.
The computation of profit from the retirement of 2,000 shares of preferred stock in 1925 and the determination of the liquidating profit realized in 1926 from the common stock are as follows:
Stock Redeemed, 2,000 shares preferred; Cost Basis, $92,200; Received, $200,000; Profit, $107,800.
On January 19, 1926, liquidation of the Illinois Company was completed and the petitioner received $346,820 in cash on account of his common-stock holdings in said company consisting of 2,000 shares. Subsequently, *1800 during the year 1926, the petitioner was required to refund to the Illinois Company, out of the amount received by him upon said liquidation as his proportionate share of certain additional liabilities of said company, the amount of $1,582. Subsequently, during the years 1927 and 1928, the petitioner was required to refund to said company out of the amount received by him in liquidation as his proportionate share of certain additional liabilities of said company the amount of $12,040.63.
The petitioner reported in his income-tax return for 1926 a gain of $111,410.46 as having been realized by him from the liquidation of *1002 2,000 shares of common stock of the Illinois Company. Said gain did not take into account refunds required to be made by the petitioner in the years 1927 and 1928 in the amount of $12,040.63 as aforesaid. The Commissioner determined that a taxable gain was realized from said liquidation in the amount of $225,397.37, his computation being as follows:
The basic cost assignable to the 2,000 shares of common stock is $233,827.54/$433,827.54 of $200,000.00 or $107,800.00.
* * *
| Stock disposed of - | Cost basis | Received | Profit |
| 2,000 shares common | $107,800.00 | $346,820.00 | $239,020.00 |
| Less: | |||
| Amount received in liquidation which was subsequently refunded to the corporation as your proportionate share of additional liabilities of the Sager Lock Co | 13,622.63 | ||
| Net liquidation profit | 225,397.37 |
*1801 In determining said gain the Commissioner reduced the total amount received in liquidation by the amounts subsequently refunded as aforesaid.
OPINION.
ARUNDELL: The question for decision is whether in computing the gain realized on the liquidation of petitioner's stock, the basis should be increased by the total excess over cost that was received on the exchange in 1923, or only by the amount of cash received on the exchange, the cash being all that was taxed as income on the exchange. In other words, what is the meaning of the phrase "gain * * * that was recognized upon such exchange" as used in section 204(a)(6) of the Revenue Act of 1926?
The parties are agreed that the immediately applicable provision for determining gain or loss on the liquidation of petitioner's stock is that part of section 204(a)(6) of the Revenue Act of 1926, which reads:
* * * the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was*1802 made. * * * (Italics added.)
That part of the quoted provision which prescribes that the basis shall be "increased in the amount of gain * * * that was recognized * * * under the law applicable to the year in which the exchange was made," necessitates a reference to the Act of 1921, which was "the law applicable" in 1923 when the stock here involved *1003 was acquired by petitioner in an exchange. The parties are also agreed that the part of the 1921 Act applicable to the case is section 202(e), as amended by Act of March 4, 1923, particularly that part which reads:
But when property is exchanged for property specified in paragraphs (1), (2) and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.
The "set-up" of the exchange in 1923, as stipulated, with italics added, is as follows: *1803
| Cash received | $200,000.00 |
| Fair market value of stock received | 433,827.54 |
| Total | $633,827.54 |
| Less cost of stock exchanged | 200,000.00 |
| Balance representing total gain computed in accordance with sec. 202(a) and (b) of the Revenue Act of 1921 | $433,827.54 |
| Portion of total gain in excess of cash received | 233,827.54 |
| Balance representing taxable gain in accordance with sec. 202(e) of the Revenue Act of 1921 | $200,000.00 |
The contention of petitioner is that the total gain of $433,827.54 is the gain that was "recognized" within the meaning of section 204(a)(6) of the 1926 Act and is the amount by which the basis should be increased in computing gain on the liquidation in 1926. The respondent says that the taxable gain of $200,000 is the "recognized" gain and is the amount to be used in determining the basis under the 1926 Act.
The chief argument of petitioner is that the phrase "gain to the taxpayer that was recognized" should be construed as meaning "gain to the taxpayer that was acknowledged and known to have been realized." If the controverted phrase stopped with the word "recognized" some latitude might be permissible in searching for its*1804 meaning. But it is limited by the additional words "under the law applicable to the year in which the exchange was made." Under the 1921 Act, only $200,000 was recognized as a gain. That was all that was included in gross income, which includes "gain * * * derived from * * * dealings in property." Section 213. Had the larger amount of $433,827.54 been a "gain * * * recognized" under the 1921 Act it would be a proper item to be included in income. While the petitioner contends that this larger amount was a recognized gain, we do not understand the claim to go as far as to say that it should have been taxed as income in 1923. The result of *1004 petitioner's argument, if accepted, would be to say that the "gain * * * recognized" means the gain that was acknowledged by each separate taxpayer. Obviously no such result was intended. On the contrary, it was realized that there must be some uniformity in the taxation of gain on exchanges and so the statute itself laid down the measure of the gain to be recognized for tax purposes.
The general intent of the revenue acts, beginning with the Act of 1921, has been to postpone the taxation of exchanges of property for similar*1805 property until such time as there was a sale or an exchange for property of a different kind. The contention of the petitioner here would extend the postponement into a complete exemption. Section 204(a)(6) of the Revenue Act of 1926 is identical with the same numbered section of the 1924 Act. The report of the Committee on Ways and Means of the House of Representatives on the Revenue Bill of 1924 explains the purpose of that section as follows:
Paragraph (6) corresponds to section 202(d)(1) of the existing law. The general theory of this section is that where no gain or loss is recognized as resulting from an exchange, the new property received shall, for purposes of determining gain or loss from a subsequent sale and for depreciation and depletion, be considered as taking the place of the old property given up in connection with the exchange. The provisions of section 203 of the bill that no gain or loss is recognized from certain exchanges do not grant an exemption and are not so intended. These provisions are based upon the theory that the types of exchanges specified in section 203 are merely changes in form and not in substance, and consequently should not be considered*1806 as affecting a realization of income at the time of the exchange. In other words, these provisions result not in an exemption from tax but in a postponement of tax until the gain is realized by a pure sale or by such an exchange as amounts to a pure sale. (P. 16, Rept. No. 179, 68th Cong., 1st sess.)
In ; , the corporate taxpayer acquired securities from several persons in exchange for its entire capital stock. The transaction was one that came within section 203(b)(4) of the Revenue Act of 1924, which provides that under the circumstances of such a case "no gain or loss shall be recognized" on the exchange. The corporate taxpayer sold the securities, and it was held by the court that the taxable gain was the difference between cost to the transferors and the selling price. Section 204(a)(8) of the 1924 Act was involved, which, like section 204(a)(6), provides that the basis shall be increased by the amount of gain recognized on the exchange. The court said that:
The rule is simply that in such cases the original transferor does not pay any tax on the gain which has*1807 accrued while he held the property, but the tax is deferred to be paid by the corporation receiving the property.
*1005 This holding is in line with the expressed intention of Congress in enacting the statutes here involved, as shown by the Ways and Means Committee report above quoted. See also statement of the Senate Finance Committee, 68th Cong., 1st sess., Rept. No. 298, p. 17.
Nor do we think that there is anything invalid in the postponement of the tax from the year of "paper profits" to the year of actual realization. . "Generally speaking, the income tax law is concerned only with realized losses, as with realized gains." .
There seems to be no disagreement as to the respondent's reduction of the taxable gain by the amounts petitioner was required to refund to the corporation.
Decision will be entered for the respondent.