*926 Petitioner acquired all of the common stock and assets of several predecessor corporations, issuing therefor bonds and all of its common and preferred stock. The common and preferred stocks were issued in the name of the bankers negotiating the consolidation of the corporations and were deposited with a trust company, which was to immediately distribute all of the common stock to the stockholders of the old corporations and release the bonds and preferred stock to the bankers upon payment therefor. Held, that immediately after the transfer to petitioner of the shares of stock and assets of the old corporations an interest or control of less than 80 percent or more remained in the transferors and that the basis to petitioner for computing allowances for depreciation and gain or loss on the sale of assets is the "cost" of the assets to it at the time of acquisition.
*588 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for the years 1925, 1926, and 1930 in the amounts of $9,527.40, $2,781.22, *927 and $18,787.03, respectively.
The only issue is the determination of the statutory basis to petitioner of the assets which it acquired at the time of its organization in 1923 for purposes of computing depreciation and gain or loss.
FINDINGS OF FACT.
Petitioner is a Massachusetts corporation and was organized on December 27, 1923, for the purpose of taking over and consolidating the several businesses then being conducted by six other corporations and four affiliates. It had an authorized capital structure of $2,000,000 par value of bonds, $1,000,000 par value of 7 percent preferred *589 stock and $1,000,000 par value of common stock. The preferred stock was divided into 10,000 shares of the par value of $100 each, and the common was divided into 20,000 shares of the par value of $50 each. Both issues carried voting privileges to the owners of record on the basis of one vote for each share held. The details of the consolidation are more fully set forth below.
On December 26, 1923, after due preliminary discussion, the banking concern of C. D. Parker & Co., hereinafter referred to as Parker & Co., made a written offer to the stockholders of the six other corporations, *928 offering "to form or cause to be formed" the petitioner herein "for the purpose of acquiring the Capital Stock of, and acquiring, owning and operating all of the property of" the six other corporations, and also the property of the four affiliates. The offer further provided in terms here material, as follows (the six other corporations are referred to in this offer as the Ice Companies and petitioner is referred to as the Company):
We [Parker & Co,] agree to pay for all of the Common Capital Stock of all the Ice Companies which we hereby offer to purchase $1,800,000 in cash and 20,000 shares of the Common Stock of the Company, such payment and delivery to be made at the times and in the manner hereinafter set forth.
1. In case this offer is accepted and becomes binding on or before December 31, 1923, we will forthwith deposit with the Cambridge Trust Company of Cambridge, Mass., the following securities, legally issued by the Company, to-wit:
10,000 shares of a par value of $100. each of 7% participating sinking fund preferred stock, the terms of which are hereinafter more particularly described.
20,000 shares of a par value of $50. each of common stock.
$1,000,000*929 face value of Series A 7% first mortgage bonds, or temporary receipts therefor.
2. The common shares of the Company deposited with the Cambridge Trust Company as aforesaid shall be immediately delivered by the said Trust Company to the holders of the receipts of the Trust Company issued for shares of the Ice Companies as called for by the receipts as follows: * * *
3. The said preferred stock and first mortgage bonds of the Company or temporary receipts therefor deposited with the Cambridge Trust Company as stated in paragraph numbered one above shall be so deposited as collateral and delivered to us upon the deposit by us with the Cambridge Trust Company of cash equal to ninety per cent (90%) of the face or par value so released and delivered to us plus the accrued interest or dividends, as the case may be from January 1, 1924 upon the stock or bonds so released or delivered to us. * * * The cash paid by us to the Cambridge Trust Company for the release and delivery to us of the said stock and bonds shall be applied first by the Trust Company to the payment of any bonds, together with interest and charges thereon now outstanding and secured by a mortgage or mortgages upon*930 any of the property to be mortgaged under and pursuant to the terms of this contract, and also to the redemption, payment and cancellation of the preferred stock of the Metropolitan Ice Company [one of the six old corporations] under and pursuant to the terms of a call of the said preferred stock. Any balance of cash so paid by us to the Cambridge Trust Company for the release and delivery to us of the said stock and bonds shall be distributed by the Cambridge Trust Company to the *590 holders of receipts issued by the Trust Company for the shares of said Ice Companies, and such distribution shall be as follows, and at the times and upon the conditions hereinafter set forth. [The maximum distribution of cash to the holders of receipts provided for in this paragraph is $1,655,000.]: * * *
In the event that this offer becomes a binding contract, we agree that we will deposit with the Cambridge Trust Company for the release and delivery to us of the said stock and bonds the following sums at the following times:
An amount of money sufficient to pay for $200,000 face value of bonds and $100,000 par value of preferred stock on or before January 21st, 1924; and thereafter*931 on or before the twenty-first day of each month to and until the time when all said bonds and stock are paid for, an amount of money sufficient to pay for at least $100,000 face value of bonds and $100,000 par value of stock.
* * *
The money paid by us to the Cambridge Trust Company and to be distributed to the holders of the said receipts as hereinbefore provided shall be distributed to the said receipt holders by the Cambridge Trust Company whenever the Cambridge Trust Company shall have in its hands for that purpose the sum of at least $130,000, which such distribution shall be made to the receipt holders ratably and proportionately in the ratio specified in paragraph three, and in no event shall there be distributed to said holders of receipts or any of them a larger sum of cash than the sum [to-wit: $1,655,000] hereinbefore provided to be paid for each share of stock received by the Cambridge Trust Company, except as hereinafter provided.
* * *
5. In case at any time we fail to deposit with the Trust Company any sum of money in the manner and upon the terms as herein provided, and such default on our part unless excused as hereinafter specifically provided, shall*932 continue for a period of sixty (60) days, any cash, preferred stock, or bonds in the possession of the Trust Company under and pursuant to the terms of this contract at the expiration of the said sixty (60) days shall be distributed as follows to the holders of receipts issued by the Trust Company, to-wit: The said preferred shares and bonds shall be so distributed as a payment on account of any balance of cash due the said holders of receipts issued under and pursuant to the terms of this agreement at ninety per cent (90%) of the par or face value of the said stock and bonds, and the said preferred shares and bonds, together with any cash, shall be distributed to said holders of receipts issued for the stock of the various Ice Companies as set forth in the same ratio or proportion as between the different companies as that set forth and provided for the payment of cash in paragraph number 3 above.
The offer further provided that the remaining $1,000,000 of authorized bonds could only be issued, if, in the future, petitioner should acquire property in addition to the acquisition provided for in the offer, and then only to the extent of a stated percentage of the value of the additional*933 property.
The offer was duly accepted by the stockholders of the six other corporations.
Prior to December 28, 1923, the stockholders of the six other corporations held meetings and passed identical votes as follows:
VOTED, on motion, to liquidate the company and after payment of its liabilities or the execution to this company of a sufficient guaranty or assumption of payment of such liabilities, then to distribute all such assets in kind pro rata *591 to the stockholders of record on December 31, 1923, and for such purpose the President and Treasurer are hereby authorized to convey any property owned by this company and to make, execute and deliver in its name and behalf such assignments, deeds, conveyances or other instruments of transfer as may be necessary or convenient in the premises.
On December 28, 1923, petitioner held a meeting of its directors that had been elected by the incorporators and the following appears as action taken by the directors at this meeting:
That C. D. Parker & Co., Inc. offers to transfer, sell, assign, and deliver to this company the following shares of stock, being all of the outstanding capital stock of said corporations [the*934 six other corporations and the four affiliates] * * * upon the condition that in consideration of so transferring, selling, assigning and delivering to this company the said shares, this company in payment therefor authorize and issue to said C. D. Parker & Co. the following named shares and bonds of this corporation:
(a) 10,000 shares of 7% Participating Preferred Stock, par $100.
(b) 19,997 shares of Common Stock, par $50.
(c) $1,000,000 face value of 7% 30-year 1st Mortgage Sinking Fund Gold Bonds Series A (or temporary receipts to insure delivery to C.D. Parker & Co. of bonds on or before January 10th, 1924).
After consideration, it appearing to directors that the properties had a value in excess of $3,000,000 (having been found by an appraisal made as of Dec. 1, 1923), it was voted that the corporation accept this offer.
On December 30, 1923, there was a meeting at which representatives of Parker & Co. and officers of the petitioner were present. At that meeting petitioner delivered to Parker & Co. $1,000,000 par value of its bonds, certificates representing $1,000,000 par value of its preferred stock, and $1,000,000 par value of its common stock, the certificates*935 being issued in the name of Parker & Co. The Cambridge Trust Co. delivered to Parker & Co. certificates representing the entire capital stock of the various predecessor companies, the blank endorsements being filled in in the name of Parker & Co., and one new certificate of each of the predecessor companies was issued in the name of Parker & Co., comprising all of the common stock of each of the predecessor companies. These new certificates representing all of the outstanding stock of the predecessor companies were immediately endorsed by Parker & Co. to petitioner and delivered to it, and on December 31, 1923, bills of sale and deeds of real estate of the predecessor companies were executed and delivered by the officers of the predecessor companies to petitioner. The preferred and common stock and the bonds of petitioner thus delivered to Parker & Co. were deposited with the Cambridge Trust Co., the common stock being split up in the hands of the Cambridge Trust Co. into the requisite number of certificates and distributed on January 21, 1924, to the stockholders of the predecessor companies in accordance with the proposition of Parker & Co., which advanced against the sums it*936 was obligated to pay sufficient funds to pay for the outstanding preferred stock of the old Metropolitan Ice Co. and to pay off any outstanding bond issues.
*592 Parker & Co. proceeded to make public offering of and to sell the preferred stock and bonds of petitioner. By March 3, 1924, the Cambridge Trust Co. had delivered to Parker & Co. $1,000,000 par value of series A, 7 percent bonds, and had received cash therefor. It also delivered to Parker & Co. 1,000 shares of the preferred stock of the petitioner on January 21, 1924, and during the balance of the month delivered 1,100 additional shares. The balance of the preferred stock was delivered to Parker & Co. from February 4 to October 17, 1924, the last 1,000 shares of the total issue of preferred stock being delivered on October 17, 1924. Payments to holders of deposit receipts issued by the Cambridge Trust Co. to the stockholders of the predecessor companies were made on different dates from January 24 to October 22, 1924. On the last named date a 5 percent distribution was made, which completed a 100 percent payment to such holders, and also an additional distribution amounting to 1.89 percent representing an income*937 distribution.
Of the total 10,000 shares of preferred stock sold by Parker & Co. 2,842 shares were subscribed and paid for by the stockholders of the predecessor companies.
On March 18, 1924, the annual meeting of the stockholders of petitioner was held and Parker & Co. at that meeting voted 5,128 shares of the preferred stock which stood in its name and which had not then been sold by it.
For the years 1925, 1926, and 1930 petitioner used a stepped-up valuation in the determination of depreciation and claimed as allowances for depreciation in its income tax returns $105,595.03 for the year 1925, $78,259.02 for 1926, and $131,506.40 for 1930.
The respondent, in his deficiency notices, determined that the basis to petitioner for computing depreciation was not a stepped-up basis, but was the same as the basis in the hands of the several transferors, and, accordingly, determined that petitioner was only entitled to depreciation allowances of $66,081.43 for the year 1925, $64,461.67 for 1926, and $89,449.96 for 1930.
By reason of the disposal of physical assets petitioner claimed losses computed on a stepped-up cost basis and the respondent computed such losses on the basis*938 of cost of such assets to the transferors. The computation of the respondent resulted in additions to the income of petitioner for 1925, 1926, and 1930 in the respective amounts of $79,991.44, $10,703.45, and $100,253.88.
The rates of depreciation used by the respondent and the amounts recovered by petitioner from the disposition of assets are not in controversy.
The parties have stipulated the basic figures for purposes of computing depreciation allowances and for the determination of gain or loss, if as a matter of law the Board should hold that the new basis for the property is allowable to petitioner.
*593 OPINION.
BLACK: What is the statutory basis to petitioner, for the purposes of computing depreciation and gain or loss, of the assets which it acquired at the time of its organization in 1923? Petitioner contends it is "cost" to it. Respondent contends that under the facts stated the basis is the same as it would be in the hands of the several transferors.
The applicable statutory provisions are section 204(a)(7) and (c) of the Revenue Act of 1926 and sections 114(a) and 113(a)(7) of the Revenue Act of 1928. These provisions of both acts are substantially*939 alike. Those of the 1928 Act read as follows:
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(a) Basis for depreciation. - The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon the sale or other disposition of such property.
SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor * * *.
It is clear from the above provisions that petitioner's contention must be sustained, unless*940 paragraph (7), supra, applies, in which event the decision would be for the respondent.
Both parties to these proceedings agree that there was a statutory reorganization within the meaning of section 203(h)(1)(A) of the Revenue Act of 1926 and section 112(i)(1)(A) of the Revenue Act of 1928. The question as to whether or not under a given state of facts there has been a statutory reorganization is a question of law for the Board to determine and we are not bound by the agreement of the parties on that issue of law. Cf. , affirming . As we view the transaction, however, it is unnecessary to determine whether a statutory reorganization was affected. The additional limitation that a control of the transferred property of 80 per centum or more remain in the same persons or any of them is also necessary in order that the basis shall be the same as in the hands of the transferor. The interest or control referred to in section 113(a)(7), Revenue Act of 1928, which we have quoted above, means beneficial ownership. Section *594 204(a)(7), Revenue Act of 1926 is the same. Cf. *941 .
It is our opinion in the instant case that "immediately after the transfer" the stockholders of the old corporations owned only the common stock of petitioner and did not own any of its preferred stock, which had equal voting rights with the common stock. The common stock amounted to only 66 2/3 percent of the total stock issued, which, of course, is less than the 80 percent provided for in the statute. It is our opinion that "immediately after the transfer" petitioner's preferred stock was owned by Parker & Co. It was issued to Parker & Co. and voted by Parker & Co. It was placed in the hands of the escrow agent solely for the protection of the old stockholders, who were to receive the proceeds from the sale to Parker & Co. The old stockholders may have had and probably did have an equitable lien on both the preferred stock and the bonds and their proceeds, to secure the part of the purchase price which was to be paid them in cash. It was not intended, however, that they should own the bonds and preferred stock except in case of default of Parker & Co. to carry out its part of the agreement. Parker & Co. had agreed*942 to pay $1,800,000 for the preferred stock and bonds - $270,000 on or before January 21, 1924, and $180,000 on or before the 21st of each month thereafter "until the time when all said bonds and stock are paid for * * *." Of course, Parker & Co. was selling the preferred stock and bonds to the public at par and had planned on realizing for itself a profit of $200,000 on the deal. The fact that the stock was not paid for immediately by Parker & Co. would not detract from their ownership of it "immediately after the transfer" if that was, as we think it was, the intention of the parties. There was a condition that if Parker & Co. should fail to pay for the preferred stock within the specified time, the shares still in the possession of the escrow agent would be delivered to the old stockholders. But this condition never arose. Parker & Co. met each installment in accordance with its agreement, the last payment in full being made on October 17, 1924. Under these conditions we think there would be no basis to hold that the 10,000 shares of preferred stock issued the same day as the 20,000 shares of common stock were owned by the stockholders of the old corporation. Cf. *943 ; ; affirmed on another point at ; , and . In each of these cases the facts show that the new stock, the ownership of which immediately after the transfer was there in question, was first actually issued by the new corporation to the old stockholders, but because the old stockholders were, at the time of receipt of the new shares, under contractual obligation to *595 sell a substantial block of such new shares to outsiders, we held that immediately after the transfer such block of stock could not be considered as owned by the stockholders of the old corporation or corporations, and, that, therefore, an interest or control in the property transferred did not remain in the same persons or any of them. In the instant case the preferred stock was never issued, even for a brief period of time, to the old stockholders. It was issued to C. D. Parker & Co., the investment bankers, who subsequently sold it to the general public. When the transactions*944 were all completed the old stockholders owned 20,000 shares of the common stock and 2,842 shares of the preferred stock, representing an investment of something more than $1,000,000, and the general public had purchased all the bonds and the remainder of the preferred stock, having voting rights equal to the common stock, representing an investment of nearly $2,000,000. In this sort of a situation it seems clear that the statute intends that the corporation receiving the assets shall get a new basis, based on cost.
We are therefore of the opinion and so hold that immediately after the transfer of the properties of the old corporation to petitioner an interest or control in such properties of less than 80 per centum remained in the same persons or any of them, and that the basis to petitioner is the "cost" to it of the properties acquired. Cf. ; ; .
Reviewed by the Board.
Decision will be entered under Rule 50.
SMITH, dissenting: The question presented by these*945 proceedings is whether the petitioner is entitled to a stepped-up basis in computing depreciation allowances and profit or loss on the sale of assets acquired. The petitioner is not entitled to such stepped-up basis provided it acquired the assets in question in connection with a reorganization and immediately thereafter an interest or control in such property of 80 per centum or more remained in the same persons as before. The parties have stipulated that the assets were acquired by the petitioner in connection with a reorganization. This means that the former owners were not subjected to income tax in respect of any profits accruing to them as a result of the transfer. The real question then is whether immediately after the transfer an interest or control in the property of 80 per centum or more remained in the same persons or any of them.
The law is well settled that until the performance of a condition laid down in an escrow agreement, the legal title to the escrowed property remains in the grantor. . The escrowed property in the proceedings *596 at bar consisted of the bonds and of all*946 the shares of stock of the petitioner corporation. Who was the owner of those bonds and shares while held by the escrow agent? Manifestly, it was not Parker & Co. Under the terms of the escrow agreement Parker & Co. was not to become the owner of any of them until it deposited cash with the escrow agent for their purchase and it was under no binding obligation to make such deposit. If Parker & Co. did not purchase them they were eventually to be turned back to the former stockholders of the consolidating companies. The real owners therefor were such stockholders.
I do not think that the words "immediately after the transfer" refer to a time long after the petitioner corporation acquired the assets. The principle invoked by the court and by the Board in ; ; and , is not applicable here. The principle which is applicable is that invoked in *947 , affirming ; and . In my opinion the petitioner is not entitled to compute depreciation and profit or loss on the sale of the assets upon a stepped-up basis.