*2989 In 1920 the petitioners consented to the dissolution of a corporation of which they were stockholders and to the receipt of a given number of shares of common stock of another corporation in exchange for their shares of preferred stock in the corporation to be dissolved. Held, that the petitioners did not sustain a deductible loss upon the exchange of shares made in 1921.
*1084 These proceedings were by agreement consolidated for hearing and decision and involve the following deficiencies in income taxes:
| Taxpayer | 1920 | 1921 |
| Frank Filer | $1,074.88 | $21,545.75 |
| Mary J. Sexton | 1,160.83 | 20,301.77 |
| Estate of E. Golden Filer | 1,389.67 | 19,197.65 |
All of the issues involved in these proceedings have been settled by stipulations filed with the Board except the question of the deduction of a loss from gross income for 1921 claimed in each of the petitions to have resulted from the dissolution of the Atlantic City Co., in which*2990 Frank Filer, Mary J. Sexton, and E. Golden Filer were stockholders. The assets of the Atlantic City Co. consisted of stock of the Atlantic City Gas Co., and that stock was distributed among the stockholders of the Atlantic City Co. in accordance with *1085 an agreement entered into by the stockholders, including the three petitioners, with the Atlantic City Co. and C. H. Geist, the promoter of the Atlantic City Co.
FINDINGS OF FACT.
E. Golden Filer died on April 13, 1921, and Frank Filer, his brother, and the Michigan Trust Co. are the executors under his will. Mary J. Sexton is a sister of Frank Filer and was a sister of the decedent.
In 1910 the partnership of Filer & Sons acquired 1,150 shares of preferred stock of the Atlantic City Co., a Delaware corporation, at $90 per share, and also at that time received a bonus of 1,150 shares of common stock of the same company. The interests of the petitioners in this partnership were as follows:
| E. Golden Filer | 5/9 |
| Frank Filer | 2/9 |
| Mary J. Sexton | 2/9 |
In 1910 there were also purchased, for the joint account of E. Golden Filer, Mary J. Sexton, and Frank Filer, 730 shares of preferred stock of the same*2991 company at $90 a share, and there was also received a bonus of 655 shares of common stock of the company. The interest of each of the above named individuals in this joint account was one-third.
In 1910 E. Golden Filer purchased for his own account 420 shares of preferred stock of the same company at $90 a share and also received a bonus of 420 shares of common stock of the company.
As a result of the above transactions the holdings of stock of the Atlantic City Co. by the petitioners were as follows:
| Preferred | Common | |
| E. Golden Filer | 1,302 2/9 | 1,277 2/9 |
| Mary J. Sexton | 498 8/9 | 473 8/9 |
| Frank Filer | 498 8/9 | 473 8/9 |
| Total | 2,300 | 2,225 |
The capitalization of the Atlantic City Co. on March 1, 1913, was, preferred stock, 8,000 or 9,000 shares of a par value of $100 each; 50,000 common shares of a value of $100 each. The fair market price of the preferred stock on March 1, 1913, was $90 per share, and of the common stock, $15 per share. At some time in 1913 the Atlantic City Co. sold an additional 1,000 shares of the preferred stock at $90 per share, making the number of shares outstanding at the close of the year 9,000.
*1086 The Atlantic*2992 City Co. owned the capital stock of the Atlantic City Gas Co., which was and is at the present time an operating company, and had $3,000,000 of bonds outstanding from 1913 to 1921, inclusive.
The Atlantic City Gas Co. was successful and its financial condition was satisfatory until 1914, when the rate at which it was permitted by the Public Service Commission of New Jersey to charge its customers proved inadequate to meet the rising cost of labor and materials. It paid dividends on its stock until July 1, 1914, but after that date no further dividend was paid until 1926. On July 1, 1918, there was a temporary default in payment of interest on its bonds and a receiver was appointed. This interest was paid, however, in September, 1918, and the receiver was discharged. From 1918 to 1921, earnings proved insufficient to pay the interest on the company's bonds and at the same time enable the company to maintain its properties and make needed improvements. To meet necessary payments of interest and to make improvements to its property, C. H. Geist personally advanced large sums of money to the operating company.
In January, 1919, the Public Service Commission permitted the Gas*2993 Co. to add a service charge which had the effect of increasing the rate which it could charge its customers from 90 cents to $1.10 a thousand cubic feet of gas consumed. In September, 1920, the company was permitted to increase its rate to $1.50 net. It was not until the company secured this second increase that it was enabled to meet its operating expenses.
The increase in rates was granted with the understanding that the Atlantic City Co., the holding company, would be dissolved. On June 1, 1920, C. H. Geist entered into an agreement with the Atlantic City Co., which provided in part as follows:
Now THIS AGREEMENT WITNESSETH:
1. That said Atlantic City Company will, by proper corporate action, cause said Company to be dissolved, and will distribute the stock of Atlantic City Gas Company, by delivering to each holder of its Preferred Stock, one-half share of stock of Atlantic City Gas Company, making a total of 4,500 shares to be so distributed, and will deliver the balance of said stock to C. H. Geist, in consideration of his releasing, or causing to be released, all of the Bills Payable of Atlantic City Gas Company.
2. Each holder of Preferred Stock of The Atlantic*2994 City Company, who subscribes his name hereto, or to a counterpart hereof, agrees to the dissolution of said Company, and distribution of stock of Atlantic City Gas Company, as above provided, and upon request of the officers of The Atlantic City Company, will execute a proxy to vote his stock, in accordance herewith, at a special meeting of stockholders to be called to carry out said purposes.
3. This agreement, or a counterpart hereof was executed by The Atlantic City Company and C. H. Geist on the first day of June, 1920, and by the holders of Preferred Stock on the dates set opposite their signatures.
*1087 This agreement was approved by the petitioners on or before December 1, 1920. Under the agreement each preferred stockholder approving the agreement was to receive one share of Atlantic City Gas Co. stock for each two shares of preferred stock of the Atlantic City Co. owned by him. At this date the common stock was worthless and no provision was made whereby the stockholders of common stock would receive anything from the Atlantic City Co. There were two preferred stockholders who refused to assent to the agreement, and upon the dissolution of the company received*2995 1-1/9 shares of stock of the Atlantic City Gas Co. for each share of preferred stock held by them.
The Atlantic City Co. was dissolved on January 5, 1921. On January 10, 1921, the petitioners received 1,150 shares of the Atlantic City Gas Co. stock for the 2,300 shares of preferred stock of the Atlantic City Co., certificates for which had been surrendered to the Atlantic City Co. pursuant to the agreement above referred to. The fair market value of the Atlantic City Gas Co. stock at the date of receipt by the petitioners was $20 per share.
In their income-tax returns for 1921 petitioners deducted from gross income the difference between the cost and fair market value on March 1, 1913, of their preferred stock, namely, $90 per share, and a fair market value of the Atlantic City Gas Co. stock received which was at the rate of $20 per share. The respondent disallowed the deduction of the alleged losses.
OPINION.
SMITH: The question presented here is whether the petitioners are permitted to deduct from their gross incomes of 1921, the difference between the cost to them of their preferred stock in the Atlantic City Co. and the value of shares of the Atlantic City Gas Co. *2996 received by them in 1921. The cost to the petitioners and the fair market value on March 1, 1913, of each share of preferred stock of the Atlantic City Co. was $90 per share. For each share of preferred stock owned each petitioner received one-half share of Atlantic City Gas Co. stock. At the date of receipt the Atlantic City Gas Co. stock was worth $20 per share. Therefore, if the petitioners are to prevail in these proceedings each one is entitled to deduct from gross income of 1921, $80 in respect of each share of preferred stock of the Atlantic City Co. owned on January 1, 1921.
Petitioners claim that they are entitled to deduct the loss by reason of the provisions of section 214(a)(5) and section 201(c) of *1088 the Revenue Act of 1921. Section 214(a)(5) permits a taxpayer to deduct from his gross income:
Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
Section 201(c) of the same statute provides:
(c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members*2997 otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.
It is the contention of the respondent that the petitioners are barred from deducting their losses by section 202 of the statute which reads in part as follows:
(a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(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 -
(1) When any such property held*2998 for investment, or for productive use in trade or business (including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use.
It is the contention of the petitioners that they did not exchange their shares of preferred stock in the Atlantic City Co. for shares of stock in the Atlantic City Gas Co. but that they received their stock in the latter company as a result of the liquidation of the Atlantic City Co., and that, therefore, section 202(c)(1) is not controlling here. It is further contended that in the present case there was no "exchange" within the usual and ordinary meaning of that term; that an "exchange" is the giving of one thing or commodity for another; barter; the act of giving and receiving reciprocally; mutual transfer (Century Dictionary); and that the transaction in the present case was not a reciprocal or mutual transfer or barter.
The record of this action indicates that the petitioners entered into an agreement with the Atlantic City Co. in 1920 under which they were to receive upon the liquidation of the Atlantic City Co. a smaller amount of the stock of the Atlantic City Gas Co. than they would have received*2999 had they not entered into such an agreement; that whereas they received one share of the stock of the Gas Co. for each *1089 two shares of preferred stock of the Atlantic City Co. owned by them, nonassenting stockholders, of which there were only two, received 1 1/9 shares of Atlantic City Gas Co. stock for each share of preferred stock of the Atlantic City Co. The entering into this agreement by the petitioners with the Atlantic City Co. and C. H. Geist makes the distribution by the Atlantic City Co. more than a liquidating dividend. The petitioners agreed to and did exchange their stock in the Atlantic City Co. for shares of stock in the Atlantic City Gas Co. The dissolution of the Atlantic City Co., although forced by the requirements of the Public Service Commission of the State of New Jersey, does not, in our opinion, affect the status of this transaction. See . The petitioners undeniably held their stock in the Atlantic City Co. as investments; pursuant to the agreement which they made with the Atlantic City Co. and C. H. Geist they received in exchange for their shares of preferred stock a certain number of shares*3000 of the capital stock of the Atlantic City Gas Co. This transaction constituted the exchange of one investment for another investment of a like kind or use. Section 202(c)(1) of the Revenue Act of 1921 is controlling and prevents the petitioners from deducting from gross income the losses claimed to have been sustained in 1921.
Reviewed by the Board.
Judgment will be entered under Rule 50.
PHILLIPS and MILLIKEN dissent.