1928 BTA LEXIS 3532">*3532 The evidence fails to show that the Commissioner erred in his determination of gain resulting from the exchange of assets for stock.
12 B.T.A. 452">*452 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $6,376.78. The question involved is whether the transaction whereby the petitioner received assets for stock during the taxable year resulted in taxable gain under section 202 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is a Connecticut corporation organized in 1911 with its principal office in Hartford. It was engaged in the business of investing in mortgages and notes secured by collateral and real estate and insurance business.
In 1920, for the purpose of simplifying bookkeeping and accounting, the corporation disposed of the real estate and insurance branch of its business to a new corporation organized to take over that part of the business. The John F. Gaffey Co., Inc., was incorporated for the purpose of taking over that part of the business. The Gaffey1928 BTA LEXIS 3532">*3533 Company agreed to and did issue to the petitioner all of its shares of capital stock of the par value of $35,000 for the assets of the petitioner which had been used in connection with the real estate and insurance branch of its business.
The capital stock of the petitioner consisted of $70,000 par value.
The book value of the assets at the time turned over to the Gaffey Company for stock was $35,000. This book value, however, included $19,949.20 which consisted of two write-ups on the books. The assets of the insurance and real estate business were arbitrarily increased by $13,750 and $5,889.17, respectively. These amounts were written up on the books on account of the increase in the business and the increase in the value of contracts acquired without consideration. The respondent eliminated these two write-ups and determined the basis to be used in determining the taxable gain was $15,050.80.
The elimination of the two write-ups from the values of the assets carried on the books represented the depreciated cost of the assets transferred to the Gaffey Company.
After the real estate and insurance business had been transferred to the Gaffey Company, the petitioner reduced1928 BTA LEXIS 3532">*3534 its capitalization to $35,000, distributing to its stockholders the stock which it received in 12 B.T.A. 452">*453 the Gaffey Company. Immediately before and after the organization of the Gaffey Company, the balance sheets of the two companies were as follows:
| A | B | C | |
| ASSETS | |||
| Cash | $1,028.94 | $1,028.94 | |
| Insurance premiums collectible | 19,916.24 | 18,916.24 | |
| Automobiles | 916.72 | 1,000.00 | |
| Rents receivable | 275.39 D | 275.39 | |
| Furniture and fixtures | 0.00 | 226.75 | |
| Good will - insurance | 20,000.00 | 20,000.00 | |
| Good will - real estate | 4,500.00 | 4,500.00 | |
| Liberty bonds | 50.00 | $500.00 | |
| Mortgage loans | 58,648.50 | 58,648.50 | |
| Due from Insurance & Title Guarantee Co | 6,569.77 | ||
| Stock of J. F. Gaffey, Inc | 35,000.00 | ||
| Total assets | 104,785.79 | 94,148.50 | 52,517.09 |
| LIABILITIES | |||
| Niagara fire balance | $7,527.64 | $7,527.64 | |
| Niagara Accounts balance | 694.12 | 694.12 | |
| Insurance brokerage payable | 9,123.47 E | 9,123.47 | |
| Sundry accounts payable | 171.86 | 171.86 | |
| Notes payable | 11,000.00 | $11,000.00 | |
| Due property owners | 3,000.00 | 3,000.00 | |
| Capital stock premiums | 300.00 | 300.00 | |
| Due to Insurance & Title Guarantee Co | 6,569.77 | ||
| Capital stock | 70,000.00 | 70,000.00 | 35,000.00 |
| Surplus | 2,698.70 | 3,278.73 | |
| Total liabilities | 104,785.79 | 94,148.50 | 52,517.09 |
1928 BTA LEXIS 3532">*3535 A - Insurance & Title Guarantee Co. before organization of J. F. Gaffey, Inc.
B - Insurance & Title Guarantee Co. after organization of J. F. Gaffey, inc.
C - J. F. Gaffey, Inc., at organization.
After the organization of the Gaffey Company, John F. Gaffey, its principal stockholders, acquired 125 shares of stock for cash at par. There were no other sales of the stock for cash in the Gaffey Company.
The stockholders in the two companies before and after the transfer of assets to the Gaffey Company and the distribution of the Gaffey Company's stock to the stockholders of the petitioner, were as follows:
| Name | Stockholders in | Stockholders | Stockholders | Stockholders |
| Ins. & F. Guar. | in Ins. & F. | in J.F. Gaffey | in Ins. F. | |
| Co. 12/31/19 | Guar. Co. | (Inc.) after | Guar. after | |
| after sale to | 1/1/20 | 1/1/20 | ||
| J.F. Gaffey of | ||||
| 125 shares | ||||
| Shares | Shares | Shares | Shares | |
| H. A. Allen | 14 | 10 | 3 | 7 |
| J. F. Gaffey | 112 | 237 | 181 | 56 |
| S. N. Dunning | 112 | 89 | 33 | 56 |
| F. J. Castonguay | 112 | 89 | 33 | 56 |
| H. B. Freeman | 98 | 77 | 28 | 49 |
| R. M. Holt | 28 | 24 | 10 | 14 |
| F. P. Holt | 84 | 65 | 23 | 42 |
| H. C. Dunning | 14 | 10 | 3 | 7 |
| L. J. Korper | 112 | 89 | 33 | 56 |
| C. S. Stearns | 14 | 10 | 3 | 7 |
| Total | 700 | 700 | 350 | 350 |
1928 BTA LEXIS 3532">*3536 12 B.T.A. 452">*454 OPINION.
TRAMMELL: There are two questions for determination in this case. The first is what was the cost or the basis to be used in the determination of the gain, if any, arising from the exchange of assets by the petitioner for stock in the Gaffey Company. The second question is what was the fair market value, if any, of the stock received in exchange.
The petitioner contends that the write-up of assets did not represent an arbitrary amount placed upon the books but represented actual values which values had been capitalized and stock dividends issued therefor. In our opinion, it makes no difference whether the write-up represented actual values or a mere fictitious value. In any event, it does not affect the question of the tax liability, unless any increase in value occurred before March 1, 1913. In determining the tax liability the question to be determined here is what was the cost or the fair market value on March 1, 1913, of the assets. There is no contention in this case that there was any increase in value between the date of acquisition and March 1, 1913, of any assets acquired prior to that time. No evidence of the March 1, 1913, value was introduced1928 BTA LEXIS 3532">*3537 in this case, nor was there any question raised with respect to the March 1, 1913, value. This being true, we will accept and approve the determination of the respondent as to the basis to be used in the determination of any gain resulting from the exchange.
The next question is whether the stock of the Gaffey Company had a fair market value at the time it was received by the petitioner. It was conceded that the stock had an actual value of at least par. The petitioner before the transfer of its assets to the Gaffey Company, and the Gaffey Company subsequently, had been prosperous and successful. The only contention in this regard is that the stock of the Gaffey Company being closely held, it did not have a market value. While this fact may have some effect on the market price or value, we do not think that it is sufficient in and of itself to deprive stock of any market value. In other words, in determining whether stock has a fair market value, the fact that it is closely held and the fact that none of it sold for cash in the open market, are evidentiary facts to be considered but are not determinative in and of themselves alone as to whether the stock had a market value. 1928 BTA LEXIS 3532">*3538 The respondent determined that it did have a market value equal to its par value and we are not convinced from the evidence that this is not true. On the other hand, the evidence supports that valuation.
Judgment will be entered under Rule 50.