*2336 In the circumstances herein the petitioner realized no profit from the exchange of certain property for the stock of a corporation.
*751 The respondent asserted a deficiency in income tax against the petitioner for the year 1922, in the sum of $1,839.79, which this proceeding seeks to review. The basic error alleged is that the respondent wrongfully determined a taxable profit of $14,000 to petitioner for the year, arising out of the exchange of certain coal properties owned jointly by petitioner and two associates, for stock *752 in a corporation organized by them to take over said properties; and, in which, petitioner claims they at the time owned control within the meaning of the provisions of section 202(c)(3) of the Revenue Act of 1921.
FINDINGS OF FACT.
The petitioner is an individual residing at Lexington, Ky., and by occupation a coal operator and mining engineer. For more than ten years he has been associated with the firm of Stuart, James & Cook, consulting engineers, of New York, as their representative in the coal fields of*2337 eastern Kentucky, West Virginia, Virginia, and Pennsylvania, in which territory he is regarded as an expert on valuations. Some time during the two years preceding 1922 the petitioner, together with Charles E. Stuart of the firm of Stuart, James & Cook and one M. J. Sanders, father-in-law of Stuart, advanced to the Hazard Star Coal Corporation the sum of $7,000 to assist it in the prospecting of certain coal leases owned by it. This corporation was but a small concern, recently organized, and at the time of these advancements owed other debts in the aggregate of $8,000, which constituted a prior lien against its assets. In accordance with conditions attached to the advancements made by petitioner and his associates, and arrangements not made clear in the record, these associates took over control of the property of this corporation and attempted to secure outside capital in its development. Failing in this last venture, the petitioner and other creditors of the Hazard Star Coal Corporation filed suits against it in the Perry County Circuit Court, in which a receiver was appointed for all of its property and the same ordered sold.
Prior to the sale of these properties the petitioner*2338 and Stuart, the latter representing the interest of Sanders as well as his own, met and discussed plans to protect their mutual interests. At this time, in 1922, an unusual condition of high prices for coal prevailed in the United States; and, in order to stimulate production and encourage the development of new mines, rulings were made by the Interstate Commerce Commission that required the railroads to give preference to development mines, irrespective of the car supply in the district, in shipment of their output to market. This situation caused the petitioner and his associates, who were familiar with the immediate conditions affecting the properties of the Hazard Star Coal Corporation, to believe that the preferences being given to development mines made such properties attractive for profitable exploitation, provided they could be put into production while high prices prevailed. They believed, with their practical knowledge of conditions, that they could organize a corporation, composed of themselves and a few business *753 associates, to take over and rehabilititate this mine and put it in operation upon a profitable basis. With this end in view, and pursuant to such*2339 understanding, the petitioner attended the sale held by the master commissioner of the court on May 8, 1922; and, being the highest bidder, purchased the property for the price of $15,000. No deed was given to petitioner at the time of this purchase, nor was any cash payment made in connection therewith; but possession of the property was delivered to him upon the giving of a decretal sale bond. On the day following the sale, the petitioner and Stuart met by appointment at the mine and agreed upon the final plans for forming the corporation. At this meeting it was agreed that a corporation should be formed with an authorized capital stock of $100,000, divided into 1,000 shares; that the coal properties and other assets purchased at the receiver's sale should be turned over to this corporation when formed, for which these incorporators should receive in payment 380 shares of its capital stock; that this stock should be distributed among them in proportion to their respective interests in the assets so transferred, measured by the amounts of their respective claims against the Hazard Star Coal Co., for which credit had been allowed to the petitioner at the receiver's sale; that the*2340 basis of this distribution should be as follows; of the 380 shares, the petitioner should receive 175, Stuart 130, and Sanders 75; that the remaining shares of stock, not thus distributed, would be offered for sale to certain friends whom they would invite to join them in the enterprise.
Following this meeting Stuart left for New York, leaving the petitioner in charge of their properties and entrusted with the task of carrying into effect their plans. On June 2, following, the petitioner procured a charter for the Bermuda Coal Co., with authorized capital stock of 1,000 shares. For the purposes of organization, the petitioner's attorney, Lewis E. Harvie, and M. L. Stone joined in the execution of the articles of association and, together with him, made up the first board of directors. In these articles the petitioner is shown to be a subscriber for 994 of the 1,000 shares of capital stock and Harvie and Stone, 3 shares each.
On June 14, 1922, with the shares of stock unissued, but represented as above set forth, the stockholders of the Bermuda Coal Co. held their first meeting and organized. Following this, on the same date, the board of directors met and, after electing*2341 officers for the ensuing year, directed by resolution, duly adopted, that a copy of the lease purchased by the petitioner be copied into their minutes of that date. They also by motion, duly adopted, employed the petitioner as general manager, secretary and treasurer of the company and authorized him to take charge of the property and proceed with the *754 business of installing machinery and equipment to operate the mine. Following this meeting the new corporation, through the petitioner as its manager, took actual possession of the property under the lease and immediately began the expenditure of money in adding improvements thereto. It also, through its officers, began offering for sale its capital stock and sold, between that date and November 7, 1922, to business associates and friends, 256 shares for the cash consideration of $25,600, which cash was added to its assets.
On November 3, 1922, the judge of the Circuit Court of Perry County, Kentucky, formally approved the report of the sale of the assets of the Hazard Star Coal Corporation made to the petitioner on May 8, and the Commissioner's deed conveying the legal title to him. Thereafter, on November 9, the petitioner*2342 executed a formal conveyance of this legal title to these properties to the Bermuda Coal Co., following a meeting of its board of directors in which proceedings as shown from the minutes of said meeting were had as follows:
The Board of Directors of Bermuda Coal Company met Nov. 9th, 1922, at the office of the Company at Chavies, Perry County, Kentucky, and the following were present, to-wit: Carel Robinson, Lewis E. Harvie, and M. L. Stone, being all the members of the Board.
Thereupon the Chairman announced that he had a proposition of sale from Carel Robinson to Bermuda Coal Company of date October 24th, 1922, for the sale of the mining plant and appurtenances at Chavies, Kentucky, for consideration by the Board, which proposition was produced and fully discussed, and upon motion duly made and seconded and carried the same was ordered spread upon the minutes of the Directors, and which is in words and figures as follows:
"BLACKEY, KY.,
"October 24, 1922.
"BERMUDA COAL COMPANY,
"Chavies, Kentucky.
"GENTLEMEN:
"I hereby propose to sell and transfer to your Company in exchange for 380 shares of capital of your company, subject to the terms and stipulations*2343 hereinafter set out, the following property, to-wit:
"First: All the property formerly owned by Hazard Star Coal Corporation, consisting principally of mining plant, equipment, commissary, goods, wares, and merchandise of every description, two coal leases, one from Stephen P. Napier and others to Harry T. Taylor, and the other from Kentucky River Coal Corporation to Harry T. Taylor; also lease for bottom land at Chavies, Kentucky, from J. E. Johnson and others to H. T. Taylor, all of which leases have been duly transferred to Hazard Star Coal Corporation. Also town lot at Chavies and store house thereon. Also railroad siding contract between Hazard Star Coal Corporation and Louisville & Nashville Railroad Company; and being identically the same property purchased by me at Master Commissioner's sale of the Perry Circuit Court, in the suits of Carel Robinson vs Hazard Star Coal Corporation, and F. J. Heazel, Trustee vs Hazard Star Coal Corporation now pending in said Court, and included in deed from W. A. Stanfill, Master Commissioner to Carel Robinson, of date November 3, 1922, and of record in deed book , page , Perry County Court Clerk's Office.
"*755 Second: Coal lease*2344 embracing two tracts of land situated on North Fork of Kentucky River, near the town of Chavies in Perry County, Kentucky, from S. P. Napier and wife to Carel Robinson, of date May 31, 1922, and recorded in Lease Book No. 7, page 139, Perry County Court Clerk's Office.
"Third: Also all rights or interests pertaining to any of the above described property now owned by me.
"All the above described property is situated at and near the town of Chavies, in Perry County, Kentucky, at the mining plant formerly owned by Hazard Star Coal Corporation, but this offer is to include any property formerly owned by Hazard Star Coal Corporation and purchased by me at the Master Commissioner's sale aforesaid, wherever the same may be situated.
"This offer is made with the understanding that if accepted, Bermuda Coal Company will assume all obligations arising under any of the leases or contracts heretofore entered into by Hazard Star Coal Corporation and which passed to me by the before mentioned sale, and also all obligations assumed by me under the lease from S. P. Napier and wife, to me herein before referred to, and will also assume the payment of a purchase money sale bond amounting to*2345 $15000.00 of date February 10th, 1922, with interest, (less, however, $7000.00 with interest thereon from May 1st, 1921) and also assume the payment of such costs, of the before mentioned two suits, if any, as are not satisfied out of the proceeds of the before mentioned sale, and will also assume the paymentof such labor or other claims, if any, as may be adjudged against Hazard Star Coal Corporation, provided they are a superior and enforceable claim against any of the property before mentioned.
"It is my intention that the Bermuda Coal Company, should it accept this offer, assume any and all obligations to which I have succeeded as purchaser of the aforementioned property and save me harmless against the assertion of any claim arising prior to February 10th, 1922.
"If this proposition is accepted, the above mentioned 380 shares of stock is to be issued to my order upon the delivery to your company by proper instruments of transfer, a conveyance of the above mentioned property and rights.
"Yours very truly,
"(Signed) CAREL ROBINSON."
Upon motion duly made, seconded, and carried, Lewis E. Harvie and M. L. Stone voting in the affirmative and Carel Robinson not voting, *2346 the following resolution was unanimously adopted:
RESOLVED, That this company accept the proposition of Carel Robinson to sell to this company the mining plant formerly owned by Hazard Star Coal Corporation, with all its assets of every kind and description, and also lease from S. P. Napier and wife to Carel Robinson of date May 31st, 1922 of record in Lease Book No. 7, page 139, Perry County Clerk's Office; and also all rights and interests of said Carel Robinson of every kind appertaining to the said mining plant, and the Board of Directors do hereby adjudge and declare that the said property is of the fair value of $38,000.00 and that the same is necessary for the business of the Company, and
RESOLVED, That the President of this company is hereby authorized and directed to immediately accept said proposition in writing in the name of this Company, and the President and Secretary of this Company are hereby further authorized and directed to issue to said Carel Robinson in payment of said property 380 shares of the capital stock of this company, when proper instruments of title are executed and delivered conveying to this company said property embraced in the proposition of sale*2347 before mentioned are executed and, delivered, and,
*756 RESOLVED, That this Company hereby obligates itself to save harmless the said Carel Robinson from any and all obligations to which he has succeeded as purchaser of the before mentioned property, or as a party to the leases in his own name before referred to and more especially against the assertion of any claim arising in connection with said property prior to February 10th, 1922.
Thereupon, Carel Robinson delivered to the directors a deed from himself to Bermuda Coal Company of date Nov. 7, 1922, prepared in accordance with the foregoing resolution, conveying and assigning to the company all his right, title and interest in and to the property referred to in said resolutions, which deed was examined and found to be correct.
Upon motion duly made, seconded and carried, it was ordered that said deed be accepted on behalf of the company and that the secretary be directed to issue to Carel Robinson 380 shares of the capital stock of the company in payment therefor, pursuant to the resolutions before referred to.
Following this meeting, 380 shares of the capital stock of the Bermuda Coal Co. were distributed to the*2348 petitioner and his associates, in amounts as follows: one certificate for 100 shares was issued to the petitioner; one certificate, at his direction, for 75 shares to Mrs. Carel Robinson, his wife; and a third certificate for 205 shares to Stuart and Sanders.
Of the original $7,000 advanced by the petitioner and his associates to the Hazard Star Coal Co., the petitioner supplied $3,000, and Stuart and Sanders $4,000 between them. In addition to this, the petitioner advanced the further sum of $500.
The assets formerly belonging to the Hazard Star Coal Corporation and transferred to the Bermuda Coal Co. were worth at the time of said transfer the sum of $12,000. In addition to this property this corporation had up to November 9, 1922, received into its treasury a total of $26,000 for the sale of 260 shares of its capital stock.
In the audit of the income-tax return of petitioner for the year 1922 the Commissioner determined that the 175 shares of the capital stock of the Bermuda Coal Co., which petitioner received at a total cost to him of $3,500, had a market value at the time of such receipt of $17,500, and that the resulting profit to petitioner from such transaction was*2349 $14,000, which he accordingly added to the income reported for said year.
OPINION.
LANSDON: In support of his appeal the petitioner urges the following propositions: (1) That the transfer of the assets by himself and associates to the Bermuda Coal Co. in exchange for which they received the stock which the Commissioner found resulted in a taxable gain to him, took place on June 14, 1922, the date of the first meeting of the board of directors, at which time they owned all of the capital stock of the corporation, and were in control of it, within the provisions of section 202(c)(3) of the Revenue Act of 1921; and that *757 under these circumstances the transaction gave rise to no taxable gain; (2) that, of the stock so issued in exchange of these interests, he received but 100 shares instead of 175 shares, as found by the Commissioner; and (3) that the market value of the stock received by him was not in excess of $47 per share, instead of $100, as found by the Commissioner. In respect to the first proposition, the respondent contends that the actual date of the transfer of petitioner's interests to the corporation was November 9, on which date the corporation by appropriate*2350 action accepted the offer theretofore submitted by the petitioner to sell these assets to it, and the deed conveying the legal title to them was delivered by petitioner; that on this latter date petitioner and his associates owned less than 80 per cent of the capital stock of the corporation and were, therefore, not in control of it within the meaning of section 202(c)(3). We then have for determination, first, which of these two dates was the one on which the rights and interests of the taxpayer in the assets exchanged for stock passed to the corporation and determined his right to receive the stock which was thereafter issued to him.
It is important first to consider the status of the petitioner as purchaser of these assets at the receiver's sale, and his relationship to his associates, who were equally interested therein at the time, as well as the corporation thereafter organized to take them over. The record shows that the petitioner bid this property in at the sale in accordance with a prearragned understanding between himself and associates, who were joint creditors of the corporation to the amount of $7,000; and, in so doing, he was acting for and in behalf of all of them. *2351 In these circumstances, the petitioner was the trustee for the other associates, and, as such, he was bound to hold the property to their use and benefit. ; ; ; ; ; . The record further shows that the day following the purchase of these assets, the petitioner and Stuart met at the mine and agreed upon the final plans that were to be followed in carrying into effect the purposes for which they purchased them. At this meeting it was agreed that a corporation was to be formed, the details of which were to be entrusted to the petitioner, for the purpose of acquiring and operating the mine. In consideration for the transfer of these assets to the corporation it was agreed that 380 shares of its capital stock should be divided among these associates in accordance with their respective interests in such properties. With this understanding, Stuart departed for New York, leaving*2352 the petitioner in possession of their property. Thereafter, on June 2, the petitioner, true to his trust, procured a *758 charter for their corporation, and on June 14, following, completed the formal organization. He also caused the corporation to indicate its possession of these assets by a formal entry of the lease in its minutes of the directors' meeting held on that date. As general manager, secretary and treasurer of the corporation, the petitioner expended its funds in improving these properties and sold stock to his friends upon the strength of such ownership being in the corporation.
Clearly, it would seem from these facts that the petitioner was the promoter of the Bermuda Coal Co. from its inception, and by reason of such relationship, a trust was cast upon him to hold the property entrusted to him for the use and benefit of such corporation. After the purchase of said property, under the facts here shown, the petitioner could not have conveyed it to the corporation he was forming under any other terms than those agreed upon between himself and his associates; more particularly, he could not have personally profited to any greater extent in the transactions*2353 than to receive the 175 shares of stock agreed upon. In declaring the rule governing promoters of corporations in dealing with their trust, the Appellate Court of Kentucky, in the case of , said in part as follows:
The promoters of a corporation stand in a confidential relation, not only to each other, but to all who may subsequently become members of the corporation, from the time they begin to promote the association, and will be required to account for the profits made by the purchase of the property for the company, and its sale at an advance. (Italics supplied.)
Other jurisdictions, without exception, have approved of this doctrine in holdings of no uncertain terms, from and among which we quote the following:
A promoter cannot make a profit by advancing the price of land which he had offered to sell to the corporation after the enterprise is so far under way as to seem probable of success. .
It is an undoubted rule of law that where two or more persons associate themselves for the purpose of purchasing property, and one of them represents*2354 the others in the purchase, he cannot receive from his associates a greater sum for the property than that which he paid for it, even though the property may be worth a great deal more than the purchase price. The same rule applies against promoters of a corporation. .
The promoter of a corporation, like its directors, is deemed to sustain towards the members of the company the relation of a trustee towards his cestui que trust. * * * This principle is undoubtedly applicable to promoters of a corporation not yet in esse. * * * . Citing Thompson on Corporations, Sec. 457, and .
To the same effect are the holdings in ; ; Pittsburg Mining*759 ; ; *2355 ; and .
In the last cited case the court, among other things, said, "The promoter is the agent of the corporation and subject to the disabilities of an ordinary agent."
In view of this relationship between the petitioner, his associates and the corporation, it is obvious that when he purchased the property on May 8 he did so as the agent and trustee for them and not himself, individually. Whatever interests or rights he acquired, therefore, in this property on said date were for and in behalf of his said beneficiaries. He, therefore, individually, owned no interest in such properties which he could later sell to the corporation had he so desired.
A situation in many points similar to that which obtained in this case was involved in the case of In the facts there, the defendant Gross was one of several organizers and promoters of a corporation, and its president and general manager from its inception. At a meeting of the associates prior to signing the articles of incorporation, it was agreed that the corporation "ought*2356 to own the site upon which its plant was to be located" and that Gross should make the purchase and take credit for the price upon his stock. Before the organization of the company was completed, Gross bought the property, paying the full purchase price out of his own funds, taking the deed in his own name and filing it of record. He later paid for his stock in full, and, as manager of the corporation, went into possession of the property, making improvements thereon at a cost of over $1,000. In the following year the corporation went into liquidation and its assets were sold by the receiver. After this sale, the purchaser of these assets learned for the first time that the title to the real estate was in the name of Gross, and sued for an accounting, alleging that, owing to the relationship which existed between Gross and the proposed corporation at the time of the purchase of this property, he (Gross) was bound, in equity, to hold it in trust for such corporation. The court sustained the contentions of the plaintiff, and, in discussion of the principle involved, among other things, said:
The important question in this case is, what was the character of the relation between*2357 Gross and the corporation, as to the site upon which its plant was erected - that is, the lot in question? Clearly, the relation was a fiduciary one. He was its agent to select and purchase a site for its plant. No other rational conclusion can be drawn from the facts found by the trial court. It is claimed, however, by defendant, that there was no fiduciary relation existing between Gross and the corporation, because the arrangement that he should purchase the site was made before the corporation was actually organized. It was competent for the corporation to adopt the preliminary *760 arrangement made by the proposed incorporators for acquiring a site for the corporation, so as to enable it to enter promptly upon the business for which it was organized, and when it did so, with the express or implied assent of Gross, he sustained the same relation to the corporation that he did to his associate promoters and incorporators. He accepted the agency and trust imposed upon him by the arrangement with the promoters, and proceeded to execute it by entering into negotiations for securing the site, * * * As its general manager he took possession of the lot for it, with its*2358 consent, as a site for its plant, and expended thousands of dollars of its money for the building, plant, and appurtenances on the lot, under its authority, before the corporation, or any officer or stockholder except himself, had any notice that the legal title to the lot was not in the corporation. * * *
* * * Now, the defendant Gross, by his conduct in putting the corporation into possession of the lot as a site for its plant, while sustaining a fiduciary relation to it, and concealing from it the fact that he had taken the title to the lot in his own name, and by erecting thereon, ostensibly for it, the building and plant, represented to the corporation that he had carried out his arrangement to purchase a site for it as a payment pro tanto on his stock subscription, and that he was expending its money as its agent on its own lot, and not on his. And we hold, upon the plainest principles of justice, that he is bound by his representations, and that, in the character of a trustee ex maleficio, he holds the legal title to the lot for the corporation, or its grantee, the plaintiff, and must convey it to him on such terms as are equitable. * * * (Italics supplied.)
*2359 In the case of , eleven citizens of Binghamton, N.Y., acquired 30 acres of land for the purpose of conducting a cemetery as copartners. Later, they decided to incorporate and sell the property to the corporation for bonds. The new corporation took possession of the property and delivered its bonds to the former owners without any formal record being made of a transfer of the legal title of such property to it. Later, the corporation resisted payment of the bonds, pleading a failure in consideration in that it had never legally acquired the real estate from the holders. The court, in that case, sustained the bonds and held that in equity the title to the property was in the corporation, saying:
The fact that no formal resolution of purchase was produced from the minutes of the corporation does not prove that there was none, because the agreement to that effect preceded by a day or two, the actual filing of the corporate certificate, at least the corporation ratified the proposed contract; for it took possession of the property, used and has ever since held the same. It must, therefore, pay or its possession*2360 becomes a robbery.
In the present case there is no question of mala fide on the part of the petitioner in his office as promoter, since he has not taken or claimed for himself anything more than the 175 shares of stock agreed upon before they launched the corporation. However, the absence of a controversy between the petitioner and the corporation does not change his relationship to it, neither does it make him the beneficial owner of property which he bought as trustee for his *761 associates and the corporation. This interest, however donominated, was represented by his certificate of purchase from the receiver who accepted his bid and declared him to be the purchaser of the property on May 8. Under such certificate, he was delivered possession of the property which he, true to his trust, delivered to the corporation upon its organization, June 14, following. At this time, it is true, no formal deed could be made conveying the property to the corporation, since that must await a confirmation of the sale from the court. However, the equitable title to the property had passed to the petitioner upon his being declared the purchaser of the property and depositing the*2361 decretal sale bond; and it was this equitable title which ipso facto vested in the corporation when delivery was made as shown. The interest which the purchaser acquires under the laws of Kentucky at such a sale as was held in this case, the courts of that State have described as being a vested equitable title to the land from the time of his purchase. In discussing this interest, the Court of Appeals, in the case of ; , said:
While it is, in a sense, true that the purchaser at a decretal sale is a preferred bidder until confirmation by the court, which bid may be rejected by the court, for cause shown, at any time before confirmation, yet it is not true that he acquires no equities by his purchase. He does acquire a vested equitable title to the land from the time of his purchase until the confirmation, and by confirmation his title becomes perfect from the date of his purchase, etc. It is upon the ground that purchasers at decretal sales are invested with the equitable title to the land purchased from the date of sale until confirmation, that any damage done the property by reason of the destruction*2362 of the buildings upon it, or other deterioration of the property, between the time of sale and confirmation, must fall upon the purchasers.
It is clear then that the purchaser acquired vested rights in these assets on May 8, the beneficial interest of which vested in the corporation by operation of law when it completed its organization and took possession of them as a corporate body. At no time after that date could the petitioner do other than to hold the property for the benefit of the corporation; and at all times, after said date, he was obliged to execute a conveyance therefor to it, upon demand, for the consideration agreed upon, to wit, 380 shares of its capital stock, no more and no less. The rights of these parties and the corporation with reference to this property and the distribution of the capital stock in payment therefor were irrevocably fixed on June 14, 1922, when it organized and took formal possession, which we find to be the date upon which the rights of the petitioner to the 175 shares thereafter delivered to him vested.
The records of the corporation indicate that a proposal to sell these assets to the corporation was made by the petitioner on October 24, 1922, and*2363 accepted on November 9, following, but it is obvious *762 that these are mere corporate formalities and could in no way affect or change the rights of the parties that had theretofore become fixed months prior thereto. Neither the petitioner nor the corporation could change the rights of the former to demand and receive the capital stock agreed upon as the price of the property, nor that of the corporation to continue holding the same and to enforce a conveyance of the legal title at a proper time. These formalities then were mere surplusage and of no extra legal effect, more than to confirm that which had already been accomplished.
As to whether or not the petitioner and his associates were in control of the Bermuda Coal Co. on June 14, 1922, it would hardly seem necessary to discuss. No stock had been issued up to this date, but the entire issue of 1,000 shares, excepting 6 assigned to the two directors, was subscribed for by the petitioner, and no person other than these owned any interest whatever in the corporation. In these circumstances the control of this corporation at this state of its existence could hardly be open to question. It is also clear from the record*2364 that at this time the corporation owned no assets that could give value to its capital stock, other than these which the promoters turned over to it in exchange for the stock in question. The stock then had no greater value than the property for which it was exchanged and no taxable gain could, therefore, result from the transaction. We think the Commissioner correctly found that the petitioner received 175 shares of the capital stock of the Bermuda Coal Co. in exchange for his interests in the assets conveyed to it. However, this question is of no importance in view of our conclusions that no taxable gain resulted from the transaction, and the decision will therefore be in favor of the petitioner.
Reviewed by the Board.
Decision will be entered for the petitioner, under Rule 50.