*2538 1. Where property acquired by petitioner in 1916 or 1917 was paid in to a corporation for common stock in 1919, which stock became worthless in the taxable year, it is held that in the absence of evidence to show the value of the property in 1919 when it was paid in for stock, or the value of the stock when received, no deduction can be allowed to petitioner on account of the worthless stock.
2. Preferred stock purchased by petitioner for cash became worthless during the taxable year and the cost thereof should be deducted as a loss.
*1039 The respondent has asserted a deficiency in income tax for 1923 in the amount of $13,557.09. The deficiency arises from the respondent's action in disallowing as a deduction the amount of $71,370.87, alleged by petitioner to represent the cost of capital stock of the Euterpe Mines Co. which became worthless in the taxable year.
FINDINGS OF FACT.
The petitioner is an individual, residing at Tulsa, Okla.
Sometime in 1916 or 1917 the petitioner, together with H. F. Aby and W. *2539 F. Tucker, purchased a mining lease on 20 acres of land in Cherokee County, Kansas, for $2,500. After considerable test drilling had been done, they decided that sufficient lead and zinc ore was contained in the property to make operations profitable. Accordingly, they purchased the necessary mining equipment and constructed a concentration plant, each party contributing his portion of the costs. As development progressed on the mine additional working capital was needed, to secure which the parties decided to organize a corporation and sell stock. In the latter part of 1919 the Euterpe Mines Co., hereinafter referred to as the Delaware company, was incorporated under the laws of Delaware to take over the lead and zinc mining venture of petitioner, Aby, and Tucker. Common stock of the corporation was issued to the individuals in exchange for their interests in the property. There were issued to the petitioner 4,812 shares. Up to that time his contributions in connection with the development of the mining property totaled $35,070.87. At various times thereafter petitioner purchased for cash 1,452 shares of preferred stock at a total cost of $36,300.
*1040 In December, *2540 1923, stock in the Delaware company was held as follows:
| Name | Shares of common stock | Shares of preferred stock |
| Simon Jankowsky | 4,812 | 1,453 |
| Hulette F. Aby | 2,406 | 100 |
| W. F. Tucker | 2,406 | 100 |
| J. E. Schneider | 437 | |
| John A. Haver | 437 | 68 |
| Walter F. Nichols | 437 | |
| C. R. Vertrees | 437 | 200 |
| T. O. Cremin | 437 | |
| C. M. Armstrong | 437 | |
| Van R. Stansbury | 437 | |
| Frank A. Haver | 437 | 80 |
In June, 1923, the Delaware company's concentration plant was destroyed by fire. After applying the proceeds of fire insurance to the payment of current obligations, its unpaid obligations, in the total amount of $117,143.95, were as follows: promissory notes due to the First National Bank, of Tulsa, $63,750; promissory notes due to the Exchange National Bank, of Tulsa, $17,500; a promissory note due to the National Bank of Commerce, of Tulsa, $5,000; a promissory note due to T. H. Mastin & Co., $1,182; to Hulette F. Aby and William F. Tucker, $17,633.19; and to Simon Jankowsky, $12,078.76. Such liabilities were greatly in excess of the value of the assets remaining, namely, a mining lease on 20 acres of land, expiring in 1926, two derricks, a blacksmith shop, and drilling and mining*2541 equipment. After June, 1923, the stock of the Delaware corporation was worthless.
Three of the stockholders of the Delaware company, petitioner, Aby, and Tucker, were endorsers of the promissory notes held by the three Tulsa banks. The stockholders other than these three refused to invest any more money in the corporation. Accordingly petitioner, Aby, and Tucker organized under the laws of Oklahomathe Euterpe Mining Co., hereinafter referred to as the Oklahoma company. Common stock in the Oklahoma company was subscribed to by petitioner, Aby, and Tucker, in the total amount of $116,000. Preferred stock in the amount of $60,000 was sold to outside parties.
On December 31, 1923, an agreement was entered into between the Delaware company and the Oklahoma company, which provides in part as follows:
The undersigned, EUTERPE MINES COMPANY, a corporation organized and existing under and by virtue of the State of Delaware, hereinafter called party of the first part, does hereby sell, assign, transfer and set over to and unto EUTERPE MINING COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Oklahoma, hereinafter called party of the second*2542 part, all of its right, title, interest and estate in and to the [description of mining lease follows].
* * * And the party of the first part hereby assigns, transfers, sets over and conveys to the party of the second part all accounts receivable, and all *1041 moneys due or coming to it, and all of the mining machinery and equipment of every kind or character now owned by the party of the first part, and located on the premises hereinabove described, and all machinery and mining equipment, tools and implements, owned by the party of the first part in the mine located on the lands hereinabove described, and known as the Euterpe Mine, including all buildings and all salvage from the burned mill, and all improvements of every kind or character in the said Euterpe Mine, or on the lands above described belonging to the party of the first part, subject, however, to the rights and interest of the estate of Charles Clark, deceased, as shown by declaration of interest, as shown by instrument of date the 23rd day of October, 1918, executed by Hulette F. Aby, William F. Tucker and Simon Jankowsky, as parties of the first part, and Charles Clark, Tulsa, Oklahoma, (now deceased), party*2543 of the second part.
IN CONSIDERATION OF THE FOREGOING, the party of the second part herein assumes and agrees to pay the following described promissory notes owing by party of the first part to the First National Bank of Tulsa, Oklahoma, to-wit:
| One note for | $23,000.00 |
| One note for | 21,250.00 |
| One note for | 5,000.00 |
| One note for | 7,500.00 |
| One note for | 4,000.00, and |
| One note for | 3,000.00 |
and assumes and agrees to pay the following described notes executed by party of the first part herein to the Exchange National Bank of Tulsa, Oklahoma, to-wit:
| One note for | $12,500.00 and |
| One note for | 5,000.00, |
and assumes and agrees to pay a certain promissory note, executed by the party of the first part to the National Bank of Commerce, of Tulsa, Oklahoma, for the principal sum of Five Thousand Dollars ($5,000.00), together with all accrued interest thereon; and the party of the second part assumes and agrees to pay to Hulette F. Aby and William F. Tucker, of Tulsa, Oklahoma, the sum of Seventeen Thousand Six Hundred Thirty-three and 19/100 Dollars ($17,633.19), owing by the party of the first part to said Hulette F. Aby and William F. Tucker, *2544 for moneys advanced party of the first part; and the party of the second part further assumes and agrees to pay to Simon Jankowsky, of Tulsa, Oklahoma, the sum of Twelve Thousand Seventy-eight and 76/100 Dollars ($12,078.76), said amount being due to the said Simon Jankowsky for moneys advanced by him to party of the first part. And the party of the second part agrees generally to pay a certain note executed by the party of the first part to T. H. Mastin & Company, for the principal sum of Eleven Hundred Eighty-two Dollars and Four Cents ($1,182.04), with the interest thereon, and any other debts or obligations of whatsoever kind or character which may be owing by party of the first part on this date.
* * *
OPINION.
LANSDON: The single question to be determined in this proceeding is whether the petitioner is entitled to deduct under the provisions of section 214(a)(5) of the Revenue Act of 1921 an amount *1042 of $71,370.87 as a loss sustained in the taxable year. Section 202(a) of the 1921 Act provides that "cost" shall be the basis for determining gain or loss. The petitioner has established that he purchased for cash 1,452 shares of preferred stock at a total*2545 cost of $36,300, and that he received 4,812 shares of common stock in exchange for property in which he had invested $35,070.87 in the circumstances set forth in our findings above. He contends that the cost of the common stock received was the cost of the property exchanged therefor. Such property, which had been purchased in 1916 or 1917, was paid in for stock in the latter part of 1919. Section 202(b) of the Revenue Act of 1918 provides that an exchange of property for stock in a corporation shall be a taxable transaction, and may give rise to gain or loss.
Section 202(b) provides:
When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * * *
The record contains no evidence as to the value of the property at the time paid in for stock, or as to the value of the stock received. We think the petitioner has failed to establish the "cost" of the 4,812 shares of common stock owned by him in the taxable year. *2546 ; ; ; ; affd., .
The respondent contends that the organization of the Euterpe Mining Co. of Oklahoma constituted a reorganization of the Delaware company and that no loss may be recognized, under the following provision of the Revenue Act of 1921:
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 in exchange has a readily realizable market value, no gain or loss shall be recognized -
* * *
(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. The word "reorganization," as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation*2547 of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, from, or place of organization of a corporation (however effected); * * *
We think our findings of fact above dispose of the respondent's contention that this was a reorganization. No person received stock or securities in exchange for stock or securities owned by him in the *1043 Delaware company. Because of his stockholdings in the Delaware company, the petitioner received no right to stock in the Oklahoma company. Stock in the Oklahoma company was purchased for cash and the stock in the Delaware company continued outstanding. There was no merger or consolidation of the two corporations. The organization of the Oklahoma company was distinct and separate. .
We have found that after the Delaware company's concentration plant burned in the taxable year its unpaid obligations greatly exceeded the value of its assets. After the transfer on December 31, 1923, the*2548 Delaware company had no assets and no liabilities other than to its stockholders. We think its outstanding stock became worthless in the taxable year and that the petitioner is entitled to deduct $36,300, which is the cost of his preferred stock. Having failed to establish the cost of his common stock, no deduction can be allowed therefor.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK concurs in the result only.
STERNHAGEN, dissenting: From the facts found it appears that petitioner, having put $35,070.87 into the oil property, exchanged in 1919 such interest for 4,812 shares of common stock in the Delaware company. Thus, as the Board says, the petitioner under section 202(b) of the 1918 Act realized gain or loss in the difference between the cost of $35,070.87 and the value of the common stock received, and the value of the stock received became the basis of any recognizable future gain or loss upon its disposition. But the value of the common stock so received in 1919 can not be found from the evidence, and therefore, if for no other reason, the measure of gain or loss in 1923 could not be determined even if under*2549 the 1921 Act any gain or loss could be recognized for tax purposes. Petitioner also bought 1,452 shares of preferred in the Delaware company at a cost of $36,300.
It seems to me that so far as the evidence shows there may have been a reorganization in December, 1923. The principal stockholders and creditors of the Delaware company caused a reorganization by means of a new corporation of Oklahoma and a contract whereby the same business properties could be operated for the same principal individuals. The facts show only that petitioner subscribed for stock in the new corporation. It does not appear how the subscription was discharged or the stock paid for. How, then, can it be said that there was not a reorganization within the *1044 broad inclusive provisions of section 202(c)(2), Revenue Act of 1921, and that the stock in the Oklahoma company was not received in place of the stock owned by him? Having invested $71,370.87 in the project of operating under the original lease, and having his investment evidenced by stock, he continued to hold an investment in this project, the corporation having been reorganized so that he subsequently held the new stock in place of the*2550 old. At least this is a possible inference from the evidence. Therefore, as provided in section 202(c)(2), no gain or loss shall be recognized.
In my opinion, petitioner was entitled to no deduction in respect of either the common or preferred stock in the Delaware corporation, and respondent's determination should be sustained.