*1493 During the taxable year 1933 petitioner received 8,000 shares of stock of a Nevada corporation in payment for services rendered by petitioner in organizing the Nevada corporation and in liquidation of advancements made by petitioner for the account of the Nevada corporation. It used 5,044 of such shares to liquidate its own indebtedness of the face amount of $21,198.38 and 1,210 of such shares in payment of services rendered by others in connection with the organization of the Nevada corporation. Petitioner in organizing the Nevada corporation failed to obtain on behalf of the Nevada corporation from the Commissioner of Corporations of California a permit to issue shares in California. Held, petitioner is not entitled to plead the invalidity of the shares issued by the Nevada corporation by reason of no California permit to issue such shares having been obtained; held, further, petitioner has failed to prove that th 8,000 shares did not have a fair market value when received of $27,040 as determined by the respondent; held, further, only the excess of the value of the 8,000 shares over the advancements of $9,594.53 may be considered as income received by petitioner*1494 for services rendered; held, further, petitioner realized a gain of $4,149.66 in using 5,044 shares to liquidate its own indebtedness; held, further, petitioner is entitled to deduct as an ordinary and necessary business expense the cost of the 1,210 shares which it transferred to others in payment of services rendered by others in connection with the organization of the Nevada corporation.
*520 The respondent determined a deficiency of $2,384.61 in income tax of petitioner for the calendar year 1933, plus a 25 percent penalty of $597.47 for delinquency, together with a deficiency of $244.04 in excess profits tax, plus a 25 percent penalty of $61.01 for delinquency, all of which is contested by petitioner.
Petitioner filed a delinquent return for the calendar year 1933, in which it reported a net income of $38.29. The respondent made three adjustments to the reported net income as follows:
| Net Income as disclosed by delinquent return | $38.29 | |
| Unallowable deductions and additional income: | ||
| (a) Income from Bakersfield Memorial Park Inc., not reported | $19,464.12 | |
| (b) Organization expenses not deductible | 132.20 | 19,596.32 |
| Total | $19,634.61 | |
| Additional deductions: | ||
| (c) Additional losses on real estate | 2,253.74 | |
| Net income adjusted | 17,380.87 |
*1495 *521 Adjustments (a) and (c) were explained by the respondent in a statement attached to his deficiency notice, as follows:
(a) Stock received by you in Bakersfield Memorial Park, Inc. for services rendered to the said corporation, constitutes taxable income under the provisions of Section 22(a) of the Revenue Act of 1932 to the extent of the fair market value of such stock at the time it was received.
| Fair value of 8000 shares Class B stock received | $27,040.00 |
| Gain reported in your return | 7,575.88 |
| Income not reported in your return | $19,464.12 |
(c) In lieu of the deduction claimed in your return for losses on sales of real estate, the following amounts of losses are allowable under Section 23(f) of the Revenue Act of 1932:
| Lots 7-8 Benzino Tract | $2,150.00 |
| Lot 12 Homecrest Tract | 415.36 |
| Lot 24 Homecrest Tract | 350.00 |
| Lot 3 Homecrest Tract | 275.00 |
| Total allowable losses | $3,190.36 |
| Losses claimed in return | 936.62 |
| Additional losses allowed | $2,253.74 |
The amended petition assigns 13 errors attacking the correctness of the respondent's adjustment (a) above in the amount of $19,464.12. Adjustments (b) and (c) are not in dispute*1496 and the only reason for setting forth the respondent's explanation of (c) above is that it is indirectly tied up with the transaction here in question. Petitioner's principal contentions as to adjustment (a) are that the 8,000 shares of class B stock received from the Bakersfield Memorial Park, Inc., were void and had no value; that, even if the stock were valid, it did not have the value ascribed to it by the respondent; and that in any event the additional income not reported was much less than $19,464.12 as determined by the respondent.
FINDINGS OF FACT.
Petitioner is a corporation, with its principal office in Bakersfield, California. It filed a delinquent corporation income and excess profits tax return for the calendar year 1933 with the collector for the sixth district of California, reporting therein a net income of $38.29.
Prior to the year 1933 petitioner, through its president, entered into a verbal agreement with a then partnership operating a cemetery in Bakersfield, California, to advance the necessary expenses in connection with the incorporation and promotion of a corporation to take over the assets of the partnership, and agreed to accept 15,000 shares of*1497 the class B stock of the proposed corporation in payment for the moneys *522 thus advanced and for the services rendered by petitioner. The agreement thus entered into contemplated the organization of a corporation in California, but the Commissioner of Corporations of California refused to issue a permit authorizing the stock issue, so the incorporators during 1933 went to Nevada and organized a corporation in that state under the name of Bakersfield Memorial Park, Inc. Petitioner then agreed to accept 8,000 shares of class B stock of the Nevada corporation for its advancements and services instead of 15,000 shares as originally agreed upon. At that time petitioner had advanced for the account of the Bakersfield Memorial Park, Inc., the amount of $9,594.53, which was expended principally for commissions, travel, interest, advertising, office supplies, office expense, stenographer's wages, attorneys' fees, state franchise taxes, commission expense, and organization expense. Of this amount $4,283.53 was expended in 1932 and $5,311 was expended in 1933. The amount expended in 1932 was deducted by petitioner in its 1932 income tax return, but petitioner did not receive any*1498 tax benefit as a result of the deduction, for it paid no taxes for 1932 and would not have been liable for any even if the amount of $4,283.53 had not been deducted. During 1933 the Bakersfield Memorial Park, Inc., issued to petitioner one certificate for 8,000 shares of its class B stock in payment for the advancements of $9,594.53 made by petitioner and for the services rendered by petitioner. The fair market value of the 8,000 shares when received by petitioner was $27,040, or a per share value of $3.38.
Prior to and during the early part of the year 1933 petitioner had obtained $9,173.38 in cash and certain real estate valued at $12,025 from numerous individuals by executing and delivering to them, at the time of the receipt of the money and real estate, certain promissory notes of the face amount of $21,198.38, accompanied by documents entitled "Agreement and Option", a specimen copy of which is as follows: THIS AGREEMENT and option made, entered into and executed in duplicate this day of in the year one thousand nine hundred and thirty-two by and between party of the first part and so hereinafter designated and the J. K. McAlpine Land & Development Company, Ltd., a corporation*1499 duly organized and existing under and by virtue of the Laws of the State of California, party of the second part and so hereinafter designated. Whereas on even date hereof and as a part consideration for this agreement and option the party of the second part has duly made, executed and delivered to the party of the first part its promissory note in the principal sum of Dollars bearing interest at the rate of per cent, and, *523 Whereas a certain group of individuals are about to organize a corporation to be designated as the Bakersfield Memorial Park, Incorporated, a limited corporation, and,
Whereas upon the completion of said corporation said party of the secone part expects to receive a certain block of capital stock of said organization of Class "B."
Now therefore it is mutually understood and agreed between the parties hereto that the party of the second part has the right and privilege upon maturity of said note to pay the obligations created thereby in lawful money of the United States or in lieu thereof deliver to the holder of said note shares of capital stock of Class "B" of the Bakersfield Memorial Park, Incorporated, a limited corporation. Should the Commissioner*1500 of Corporations of the State of California impound Class "B" stock, the payee of the herein mentioned note agrees to extend the maturity of the obligations created by the execution of said note to the date of release of said impounded stock.
This agreement and option to inure to and bind the heirs, executors, administrators and assigns of the respective parties hereof.
In witness whereof we have hereunto set our hands the day and year in this agreement and option first above written.
During the taxable year 1933 petitioner elected, under its agreement and option with the holders of the notes payable, to deliver 5,044 of the 8,000 shares of Bakersfield Memorial Park, Inc., to the holders of such notes of the face amount of $21,198.38 in complete liquidation thereof. These notes had originally been issued by petitioner, some for cash alone in the amount of $6,969, some for a combination of cash and real estate in the respective amounts of $2,204.38 for cash and $11,000 for real estate, and some for real estate alone in the amount of $1,025. Petitioner used 3,583 of the 5,044 shares to liquidate the notes that had been issued for the cash alone, 1,321 shares to liquidate the*1501 notes that had been issued for the combination of cash and real estate, and 140 shares to liquidate the notes that had been issued for the real estate alone, all of which may be summarized as follows:
| Notes liquidated | ||
| Shares used for liquidation of notes | Notes originally issued for cash | Notes originally issued for real estate |
| 3,583 | $6,969.00 | |
| 1,321 | 2,204.38 | $11,000 |
| 140 | 1,025 | |
| 5,044 | 9,173.38 | 12,025 |
During the period 1932 to 1936, petitioner eventually realized $4,367.47 on the real estate originally acquired for notes in the face amount of $12,025, as follows:
| Description | Notes originally issued for real estate | Amount realized and date thereof |
| Lot 24, Homecrest Tract | $350 | Quitclaimed in 1933. |
| Lots 6-7, Homecrest Tract | 900 | $500.00 in 1934. |
| Lot 3, Homecrest Tract (B. 5) | 400 | 187.50 in 1934. |
| Lot 30 & W. half of Lot 31 | 400 | No legal title ever received. |
| Lots 15-16, Alta Vista | 1,500 | 451.23 in 1932. |
| Lots 17-19, Kern Tract | 1,000 | 750.00 in 1935. |
| Lot 17, Homecrest Tract | 500 | 275.00 in 1934. |
| Lot 5, Homecrest Tract | 750 | 225.00 in 1936. |
| Lot 13, Homecrest Tract | 100 | No legal title ever received. |
| Lot 9, Homecrest Tract | 500 | 275.00 in services. |
| Lot 8, Primavera | 600 | 300.00 in 1934. |
| Lot 3, Homecrest Tract (B. 14) | 400 | Quitclaimed in 1933. |
| Lot 4, Homecrest Tract (B. 14) | 400 | 125.00 in 1934. |
| Lots 27-28, Keith Addition | 200 | No legal title ever received. |
| Lots 7-8, Benzino Tract | 3,000 | 803.74 in 1933. |
| Lot 4, Homecrest Tract (B. 4) | 400 | 350.00 year not shown. |
| Lot 16, Glass City | 500 | No legal title ever received. |
| Crypt | 125 | 125.00 still owned. |
| Total | 12,025 | 4,367.47. |
*1502 *524 During the year 1933 petitioner transferred 1,210 of the 8,000 shares of Bakersfield Memorial Park, Inc., to various parties for assistance, moral or otherwise, in connection with the promotion of the project. The details of these transfers show that 210 shares were given out to 21 different people at 10 shares each for the use of their name and their help in promoting the Bakersfield Memorial Park; that 100 shares were given for a job printing deal; that 500 shares were given to one person as a bonus for services in connection with the sale and development of the Bakersfield Memorial Park; that 100 shares were given as a bonus to a publicity agent for his services in connection with Bakersfield Memorial Park; and that 300 shares were given as a special bonus for services in connection with the promotion of the Bakersfield Memorial Park.
OPINION.
BLACK: The first of petitioner's principal contentions, as noted in our preliminary statement, is that under the Corporate Securities Act of California the issue of the 8,000 shares of class B stock of Bakersfield Memorial Park, Inc., a Nevada corporation, was void because no permit for the issue thereof had been obtained*1503 from the Commissioner of Corporations of California. In support of this contention petitioner cites and relies upon the two cases of , and ; . Petitioner argues that, if correct in this contention, it necessarily follows that when it received the 8,000 shares in question it could not as a matter of law have received anything of value and that the respondent's entire determination of the deficiencies and *525 penalties in question must be disapproved. Petitioner also makes two other points in connection with this argument. The first is that, if correct in its contention that the 8,000 shares issued were void, then petitioner in delivering 5,044 of the 8,000 shares to the holders of the notes of the face amount of $21,198.38 did not deliver to them anything of value and could not, therefore, liquidate such obligations. The second is that the documents (agreements and options) executed in connection with the notes were also void by reason of petitioner's right to liquidate such notes with the stock in question, and that the sole recourse of*1504 the parties holding such documents was limited to a recovery of the cash advanced ($9,173.38) and the property transferred (valued when received at $12,025) or, in the even that such property had been sold by petitioner, to the consideration received ($4,367.47) on the sale thereof. Petitioner's remaining principal contentions are as noted in our preliminary statement.
The respondent simply asks for the affirmance of his determination on the ground that petitioner has failed to prove it wrong in any particular.
We do not wholly agree with either petitioner or the respondent. We do not think petitioner may be heard to contend that the issue of the 8,000 shares was void under the Corporate Securities Act of California. Petitioner caused the Bakersfield Memorial Park, Inc., to be organized and caused it to issue the 8,000 shares without securing the necessary permit from the Commissioner of Corporations of California. Were we now to permit petitioner to contend that the issue of the 8,000 shares was void, we would be permitting petitioner to take advantage of its own wrong, a result which the law disfavors. See *1505 ; ; . In ; , the Supreme Court of California in its opinion said:
The inhibitions of the Corporate Securities Act (Deering's gen. Laws, 1923, Supp. 1927, 1929, p. 3287, Act 3814) against sales of securities to the public without permits are meant to protect the public from imposition and deception - not primarily to benefit the seller. The seller and the purchaser are therefore in no sense in pari delicto where this provision is violated. The fact that the transaction may be void at the behest of the purchaser is not to allow a premium for real wrong done by the seller. The fundamental maxim that "no one can take advantage of his own wrong" (section 3517, Civ. Code), and other kindred principles, immediately recur to the mind. The above is but a recast of the doctrine abundantly supported by authority and applied in cases involving this very act done under*1506 similar circumstances. [Citations.]
The record before us does not show that any of the recipients of the stock in question ever at any time contended that it was void and of *526 no value. A security may have value even if it be issued without a permit. This was the situation in ; , wherein the court said, "In the case herein the units proved to be valuable, notwithstanding they were issued without a permit." See also ; . The cases cited by petitioner would be authority in favor of any of the note holders if such holders had elected to contest the validity of the stock, which they did not do. So far as the records show, the stock which was transferred to them by petitioner in 1933 is still valid and outstanding. In fact so far as the record shows the entire block of 8,000 shares is still valid and outstanding. The cases cited by petitioner can not be used as authority in favor of petitioner in this proceeding, for the reasons already stated. Petitioner offered no evidence*1507 whatever as to the fair market value of these shares. We hold, therefore, that petitioner has failed to prove that the 8,000 shares received by petitioner during the taxable year did not have a fair market value of $27,040 when received, as determined by the respondent.
The respondent determined that the entire value of the shares was income to petitioner, on the ground that they were received for services rendered by petitioner in organizing the new corporation. But the shares were not received entirely for services rendered, but in part for the liquidation of the advancements of $9,594.53 which petitioner made for the account of the Bakersfield Memorial Park, Inc. We think it follows that only the excess of the value of the shares over such advancements may be considered as income to petitioner for services rendered. It is true petitioner deducted $4,283.53 of the advancements of $9,594.53 in its 1932 return. It did not, however, for the reasons stated in our findings, receive any tax benefit on account of such erroneous deduction in 1932. That being the case, we do not think petitioner should be charged with income in 1933 when it was reimbursed for the expenditures which*1508 it made in 1932 for the account of another. As a matter of fact a taxpayer is not entitled to a deduction as business expenses for amounts which it pays out for another and for which it has a contract of reimbursement. Petitioner was reimbursed for what it paid out for the Bakersfield Memorial Park, Inc., in the form of stock issued to petitioner and a part of the cost of that stock to petitioner is what it paid out in both 1932 and 1933.
Upon receipt of the 8,000 shares petitioner used 5,044 of such shares, having a cost basis of $17,048.72, to liquidate its own indebtedness of the face amount of $21,198.38. This unquestionably represented a gain to petitioner of the difference in the amount of $4,149.66. Petitioner suggests in its brief that any such difference would be equivalent *527 to a forgiveness of indebtedness by the note holders and would not be income to petitioner, since it had requested us to find that petitioner was insolvent both at the beginning and end of the taxable year. The record does not support such a finding of insolvency and, even if it did, it would be of no hilp to petitioner, as the transaction was not one involving the forgiveness of indebtedness*1509 but one involving the payment of a debt by petitioner in accordance with a contract previously entered into wherein petitioner had the option of making payment either in cash or stock. It elected to make payment in stock which had a cost basis to petitioner of $3.38 per share. We hold that the above difference of $4,149.66 was income to petitioner during the taxable year 1933.
During the taxable year 1933 petitioner also used 1,210 of the 8,000 shares for the purposes set out in our findings. We think that petitioner should be permitted to deduct the cost of such shares in the amount of $4,089.80 as an ordinary and necessary business expense.
We hold, therefore, that the additional income from the Bakersfield Memorial Park, Inc., not reported by petitioner in its return was $9,929.45 instead of $19,464.12 as determined by the respondent, which amount of $9,929.45 is arrived at as follows:
| Fair market value of 8,000 shares | $27,040.00 |
| Less advancements made by petitioner | 9,594.53 |
| Income to petitioner for services rendered | 17,445.47 |
| Add gain to petitioner in disposition by petitioner of the 5,044 shares in liquidation of petitioner's indebtedness of the face amount of $21,198.38 | 4,149.66 |
| Total | 21,595.13 |
| Deduct expense to petitioner in disposition by petitioner of 1,210 shares | 4,089.80 |
| Correct gain from transaction | 17,505.33 |
| Gain reported by petitioner | 7,575.88 |
| Additional income not reported | 9,929.45 |
*1510 The petitioner has offered no evidence to excuse the delinquent filing of its income and excess profits tax return for the taxable year. Hence, in a computation of the deficiency under Rule 50 a 25 percent penalty will be added. On the imposition of delinquency penalties the Commissioner must be sustained.
It may be noted in passing that the losses allowed under respondent's adjustment (c) in the amount of $3,190.36, of which $936.62 was claimed by petitioner on its income tax return and $2,253.74 was allowed in addition in the deficiency notice, cover the losses sustained during the taxable year 1933 on the property disposed of during that *528 year as set out in the schedule in our findings showing the realization of $4,367.47 from the real estate acquired at a cost of $12,025.
The deficiencies and penalties should be recomputed upon the basis of an adjusted net income of $7,846.20 instead of the $17,380.87 adjusted net income used by the Commissioner in his deficiency notice.
Decision will be entered under Rule 50.