*599 These three appeals were consolidated for hearing and involve deficiencies in income tax for the calendar years 1925 to 1928, inclusive. Docket No. 42719 arises upon a deficiency in the amount of $10,581.31 for 1925, and raises three issues - (1) The respondent's disallowance of a loss claimed by the petitioner in that year of $82,438.26 on an exchange of stock; (2) the disallowance of a deduction for depreciation; and (3) the respondent's failure to deduct for 1925 the full net loss claimed in that year on the basis of a deduction for depreciation in 1924 claimed but disallowed. The parties stipulated that the allowance of petitioner's claimed depreciation base for 1924 would result in the full net loss deduction, as claimed, in 1925. Docket No. 42718 involves a deficiency of $2,100.53 for 1926, and of $900.64 for 1927; both years raising the sole issue of depreciation disallowed. Docket No. 54660 involves a deficiency for 1928 of $2,087.17, and raises two issues - (1) depreciation; and (2) the respondent's calculation of gain on a sale of certain*1097 stock by petitioner in that year. The error assigned on depreciation, which arises in all the years here in question, is twofold: (1) The respondent's disallowance of $100,000 on the depreciation base; and (2) the respondent's rate of 10 percent, instead of 12 1/2 percent as claimed by the petitioner, allowed on depreciation of steel rails.
From evidence introduced at the hearing and certain facts stipulated by the parties, we have made the following findings of fact.
*600 FINDINGS OF FACT.
1. (a) Petitioner is a corporation organized under the laws of the State of West Virginia in January 1920, and has its principal office at Beckley, West Virginia.
The petitioner, when organized, had an authorized capital stock of $600,000, consisting of 6,000 shares of the par value of $100 per share. On January 17, 1920, at the first meeting of the board of directors, a proposal of sale was made to petitioner by C. H. Mead and C. S. Mead, who stated that they had obtained an option upon the property of the East Gulf Coal Co., Raleigh, West Virginia, including leaseholds on about 2,500 acres of coal land and all mining equipment, improvements, and supplies used by the East Gulf*1098 Coal Co. in its operations; that the leasehold covered valuable tracts of coal land; that the East Gulf Coal Co. had started business in 1916 and that the buildings, plant, and equipment were practically new and that it was a going and profitable concern. The East Gulf Coal Co. was the lessee of the land referred to above. It had developed the property and begun production in 1916. The option given to the Meads contemplated the sale of East Gulf Coal Co.'s physical plant, improvements, machinery, etc., for $235,000 in cash, payable in certain installments within nine months from delivery of possession of the property; the granting of a sublease on the land for all purposes consistent with the original lease, the consideration for the sublease being (1) the assumption of all royalty obligations carried in the original leases, and (2) the payment by the sublessee to the sublessor of an annual rental of $50,000 for the twelve years next ensuing, and the substitution of the sublessee to the rights of the East Gulf Coal Co. to the proceeds of a certain contract with the Virginian Railway Co. and to certain rents. Under the terms of this option the sublessee was to begin the development*1099 of another mine within one month from the date of delivery of possession and promptly to install up-to-date mining equipment with a capacity of not less than 500 tons per day for the development of a certain portion of the land.
The proposal by the Meads to petitioner was to cause the property so optioned to them to be conveyed to petitioner for the consideration named in the option, plus 1,000 shares of petitioner's capital stock of the par value of $100,000. The letter containing the proposal reads as follows:
By reason of a certain agreement made and entered into by the East Gulf Coal Company with C. H. Mead and C. S. Mead, we hold certain rights or option to sublease from the said East Gulf Coal Company about twenty-five hundred (2,500) acres of land, being the property known as East Gulf Coal Company's Tract No. 1 and Tract No. 2, situate on Stone Coal Creek of *601 Guyandotte River, Slab Fork District of Raleigh County, West Virginia, containing about twenty-five hundred (2,500) acres, which said agreement includes right to purchase all mining equipment, merchandise, buildings, power lines, tram roads, and, in fact, all the improvements, equipments and supplies of*1100 every character now on the above mentioned two tracts, and used in connection with the present mining operations.
You gentlemen are familiar with these properties, and for that reason we shall not go fully into a detailed description of the improvements thereon. We have also discussed with you the question of purchase by your company, namely, C. H. Mead Coal Company, of our rights held by us by reason of our option or agreement with the said East Gulf Coal Company, and we hereby wish to present to you for your further consideration a written offer to assign to you all of our right, title and interest in and to the above mentioned properties held by us by reason of our agreement with the said East Gulf Coal Company, upon the following terms and conditions:
FIRST: That the said C. H. Mead Coal Company shall assume our said agreement with the East Gulf Coal Company upon the terms and conditions set out in said agreement, including all the rights and liabilities in and under said agreement, and shall take all necessary steps to properly and legally take over and cause to be conveyed to the said C. H. Mead Coal Company in the name of the said C. H. Mead Coal Company the rights and*1101 interest now held by us by reason of our agreement with the East Gulf Coal Company.
SECOND: Provided, however, that the said C. H. Mead Coal Company shall enter into a proper agreement to convey and cause to be conveyed one thousand (1,000) shares of the capital stock of the said C. H. Mead Coal Company, which said one thousand (1,000) shares shall be fully paid and non-assessable, to such parties as shall be designated in writing to the company by the said C. H. Mead and C. S. Mead. In other words, we hereby wish to present to you the offer to purchase all of our right, title and interest held by us by reason of our agreement with the East Gulf Coal Company in and to the above mentioned property, for the consideration of one thousand (1,000) shares of the C. H. Mead Coal Company's capital stock fully paid and non-assessable, which said stock is to be transferred to the parties herein designated by us.
The offer was accepted on January 17, 1920, and the property conveyed by East Gulf Coal Co. to petitioner by deed dated January 26, 1920. The hundred thousand dollars par value of petitioner's stock was thereupon issued to C. H. Mead and C. S. Mead.
The option held by the*1102 Meads to purchase the East Gulf Coal Co.'s property was oral and never put in writing.
The Meads transferred no physical or other property than the option to petitioner in exchange for petitioner's 1,000 shares of stock.
All the remaining $500,000 of petitioner's capital stock was sold during 1920, $498,800 par value thereof having been sold to others than the Meads. Sales were on subscription agreements calling for payments at certain times, that is to say, 20 percent cash with the subscription and the balance at the rate of 10 percent per month payable on the 15th day of each month, commencing on March 15, 1920. All sales were made at par and during the months of February *602 and March 1920, at least 3,265 shares of said stock, or $326,500 par value thereof had been sold. On December 31, 1920, only $5,460 of the subscriptions made remained unpaid.
Petitioner's capital stock had a market value in January 1920, equal to its par value of $100 a share.
Petitioner capitalized the $100,000 of stock issued to C. H. Mead and C. S. Mead and set up the various classes of physical assets acquired at a total of $335,000 instead of $235,000, the price thereof named in the*1103 option and subsequently paid in cash by petitioner to the East Gulf Coal Co. In determining the allowable deduction for depreciation the Commissioner reduced petitioner's depreciation base by deducting $100,000 therefrom by the following adjustments:
| Item | Added to | Deducted from |
| book basis | book basis | |
| Mine cars | $13,647.40 | |
| Furniture and fixtures | 808.05 | |
| Motors and mine machines | 8,173.29 | |
| Tenements | 49,545.86 | |
| Side tracks | 11,788.50 | |
| Tipple | 7,124.14 | |
| Development #1 | 3,297.37 | |
| Substation | 2,679.11 | |
| Incline #1 | 9,633.72 | |
| Hoist | $3,827.71 | |
| Steel rails | 1,490.09 | |
| Copper wire | 1,379.64 | |
| Total | 6,697.44 | 106,697.44 |
| 6,697.44 | ||
| Net deduction | 100,000.00 |
It is the contention of the petitioner that these deductions should not have been made from the book value of the depreciable assets as set up by petitioner, and that they should now be restored to petitioner's depreciation base and depreciation allowed thereon for the yars 1924 to 1928, inclusive. The parties stipulated that if the Board should be of the opinion that the $100,000 should be restored to petitioner's cost of physical assets, then the changes made by the respondent should*1104 be reversed and petitioner's property depreciated on the basis of book value originally set up.
The adjustments made by the Commissioner in reducing the book value of these depreciable assets resulted in reducing the various items thereof to the approximate cost thereof to the previous owner, the East Gulf Coal Co., in 1915 and 1916, which was $235,000.
The value of the physical assets transferred by the East Gulf Coal Co. to petitioner in 1920, under the option given the Meads and exercised by the petitioner, was, at the time of such transfer, not less than $335,000.
The cost to petitioner of the physical assets acquired from the East Gulf Coal Co. was $235,000.
*603 (b) By stipulation, the parties agreed on the rates of depreciation which petitioner is entitled to use in the calculation of depreciation upon certain of its assets, and effect will be given thereto in the computation under Rule 50. Under the conditions prevailing in petitioner's mines, the average life of steel rails used on petitioner's property was not more than 8 years, with a consequent rate of depreciation of 12 1/2 percent per annum.
2. In the year 1925, petitioner was the owner of 2,083*1105 shares of the preferred stock of Interstate Coal & Dock Co. of Maine, hereinafter called the Maine Co., representing a cost to petitioner of $120,318.26. The Maine Co. controlled and operated from 1921 to 1925 the Low Volatile Consolidated Coal Co., a West Virginia corporation, hereinafter called the West Virginia Co., all of whose stock was common stock. The Maine Co. owned 9,600 shares of stock of the West Virginia Co. out of a total of 13,516 shares outstanding. On October 10, 1922, the assets of the Maine Co. were mortgaged under a deed of trust with the Union Savings Bank and Trust Co. as collateral security for a loan of approximately $500,000. The mortgage was subsequently transferred to the Union Trust Co., Cincinnati, Ohio. Under date of May 9, 1925, there was sent to each of the stockholders in both companies a letter setting forth the plan for refinancing these companies. The letter to the petitioner was as follows:
At the informal meeting of the stockholders and certificateholders of Interstate Coal and Dock Company and stockholders of the Low Volatile Consolidated Coal Company held at Cincinnati, Wednesday, April 15, 1925, at which there were present more than*1106 60% of the preferred stock of the Interstate Coal and Dock Company and more than 80% of the outstanding stock of the Low Volatile Consolidated Coal Company, it was unanimously voted after full discussion that the only practical method of refinancing these companies is through reorganization.
The indebtedness of these companies consists mainly of the unpaid balances due on the original purchases of the mines in West Virginia which was incurred in 1920. This purchase price debt constitutes so great a burden that it cannot be longer carried without additional financing.
In accordance with the resolutions adopted at that meeting a new corporation has been formed under the laws of Ohio known as LOW VOLATILE COAL COMPANY, for the purpose of acquiring at foreclosure or other sale, the property of the Interstate and Low Volatile Consolidated Companies and protecting the parties in interest. The capital stock of the new Low Volatile Coal Company will consist of 10,000 shares of $100.00 par value each or $1,000,000.00 of 7% cumulative preferred stock, and 20,000 shares of common stock without nominal or par value. All shares, both common and preferred, will have equal voting rights.
*1107 In case of redemption at any time of less than all of said preferred stock such redemption shall be applied pro rata to all the shares of preferred stock issued and outstanding.
*604 It was determined at the Cincinnati meeting to offer for subscription the preferred stock of the new company at par to the stockholders of the Interstate Coal & Dock Co., their allotment of 7800 shares being based on their proportion of the net obligations of the two companies; and to the minority stockholders of the Low Volatile Consolidated Coal Company (being all the stockholders of said company other than Interstate Coal and Dock Company) their allotment of 2200 shares being based on their pro rata proportion of the net obligations of the Low Volatile Consolidated Coal Company.
Arrangements have now been made with the officers of the new company, so that we are able to offer this preferred stock for subscription at par. The 7800 shares of preferred stock allotted to the Interstate Coal Company is hereby offered pro rata at par to the certificate holders representing its preferred stock and the 2200 shares of preferred stock allotted to the minority holders of Low Volatile is hereby*1108 offered pro rata at par to those stockholders.
Subscribers for preferred stock will receive with each share of preferred stock one share of the common stock without further payment. Until said subscriptions are fully paid certificates will be issued to the subscribers showing thereon the amount paid and the amount yet to be paid upon call.
Proper steps will be taken so as to permit the distribution of the remaining 10,000 shares of Common stock to the holders of preferred stock of the Interstate Coal and Dock Company and to the minority holders of the Low Volatile Consolidated Coal Company upon the basis of 45% of a share of such new common stock for each share of Interstate Coal & Dock Company preferred and 45% of a share of such new common stock for each share of Low Volatile Consolidated Coal Company stock so held, whether they subscribe for the Preferred stock of the new company or not. Distribution of fractional shares shall be subject to such regulations as the directors of the new company deem advisable.
Ten per cent of the subscription price for such Preferred stock must be paid on or before June 4th, 1925. Calls for the balance will be deferred as long as possible, *1109 and in any event will not be made more rapidly than at the rate of 10% in any period of minety days.
We are advised foreclosure proceedings will be commenced on May 10 under the mortgage given by Interstate Coal & Dock Company to the Union Trust Company of Cincinnati, and the financial needs of these companies are very pressing. It is therefore essential that your subscription be promptly received.
We enclose herewith a copy of the Subscription Agreement. Your pro rata proportion of the Preferred stock is 879 shares, which amount will be allotted to you on receipt of your subscription. In the event that you desire to subscribe either for a larger or a smaller amount than your pro rata share, you may do so, indicating on the subscription blank the number of shares you will take. In case you subscribe for a larger amount than your proportion, the Company reserves the right of rejecting or modifying any such subscription, if it becomes necessary to do so.
* * *
[Signed] E. M. Poston, President,
INTERSTATE COAL & DOCK COMPANY, and
C. H. MEAD, Vice President,
LOW VOLATILE CONSOLIDATED COAL COMPANY.
On June 30, 1925, the Union Trust Co. foreclosed under*1110 the deed of trust, and all the assets of the Maine company were sold to the *605 newly formed Low Volatile Coal Co., an Ohio corporation, hereinafter referred to as the Ohio Co., at the price of $491,100.
The outstanding stock of the several corporations mentioned was as follows:
| Shares of | Shares of | |
| common stock | preferred | |
| stock | ||
| Interstate Coal and Dock | 49,571 | 20,862 |
| Co. (Maine) | ||
| Low Volatile Consolidated Coal | 13,516 | |
| Co. (West Virginia) | ||
| Low Volatile Consolidated Coal | 19,758 | 9,600 |
| Co. (new, Ohio) |
A consideration of the outstanding capital stock of the companies as stated above and of the common ownership of it (after elimination of the 9,600 shares of the common stock of the West Virginia Co. owned by the Maine Co.), discloses that of both common and preferred stock, 79.8854 percent of the stockholders of the Maine and West Virginia companies owned after this transaction 67.8181 percent of the stock of the new Low Volatile Coal Co. of Ohio.
The petitioner did not, at the time, exercise its right to subscribe to 879 or any lessor number of shares of the preferred stock of the new Ohio company (and with each share of preferred*1111 bought, to receive one share of common free), as set out in the proposal above, but received by reason of its ownership of 2,083 shares of the preferred stock of the Maine Co. without additional payment, 947 shares of the common stock of the Low Volatile Coal Co. of Ohio.
Petitioner estimated the value of the 947 shares of common stock thus acquired to be $40 a share, or $37,880. On its 1925 income tax return it deducted as a loss $82,438.26, which is the difference between the above estimated value and $120,318.26, the cost of the old stock in the Maine Co. The Commissioner disallowed this deduction.
The fair market value of the common stock of the Ohio Co. received by petitioner in 1925 was not more than $40 per share.
The stock of the Interstate Coal & Dock Co. of Maine was valueless after the sale of its assets under foreclosure of the mortgage on June 30, 1925.
3. Petitioner bought in December 1927, 739 shares of the preferred stock of the Low Volatile Coal Co. (the Ohio Co.) for $76,610.72, and received with each share of preferred so purchased, one share of common stock. In August 1928, petitioner sold 54 shares of the same preferred stock for $5,346, or $99*1112 a share.
The respondent computed the cost of the stock purchased in 1927 as follows:
| Cost of 739 shares preferred stock | $76,610.72 |
| and 739 shares common stock | |
| Cost per share of preferred and common, | 103.66 |
| $76,610.72 divided by 739 | |
| Cost allocated to preferred stock, 50% | 51.83 |
*606 The gain on the sale in 1928 of 54 shares of preferred stock was then computed as follows:
| Cost of 54 shares preferred stock at $51.83 | $2,797.82 |
| Sold for | 5,346.00 |
| Gain | 2,548.18 |
Petitioner contends that the cost of the preferred stock was in excess of the amount determined by respondent.
The fair market value of the common stock of the Low Volatile Coal Co. of Ohio was, in 1927, not more than $40 a share.
OPINION.
MATTHEWS: 1. The issue with respect to depreciation falls under two heads - (a) the basis to be used, and (b) the rate to be used in determining the depreciation allowable on steel rails.
(a) The petitioner recognizes that cost is the basis to be used in determining depreciation and contends that $335,000 was the cost to it of the depreciable property acquired upon its organization in 1920. Respondent contends, on the other*1113 hand, that the petitioner paid only $235,000 for the property and has calculated depreciation on this basis.
The facts, simply stated, are these:
C. H. and C. S. Mead obtained on oral option from the East Gulf Coal Co. to sublease 2,500 acres of coal lands, which carried with it the right to purchase the plant and mining equipment placed on the leased lands by the East Gulf Coal Co., and the right to the proceeds of a contract with the Virginian Railway Co. and to certain rents, the Meads to assume the royalty obligations under the original lease, to pay the East Gulf Coal Co. $50,000 rent a year for 12 years and to pay $235,000 for the physical equipment on the property. They offered to sell the option to the petitioner in return for 1,000 shares of petitioner's stock having a par value of $100. This offer was accepted by petitioners, the 1,000 shares were issued by the Meads for their option and the purchase price of $235,000 for the physical assets paid over by the petitioner to the East Gulf Coal Co.Petitioner added $100,000 to the cost of the physical assets and contends that this was proper because the property when received from the East Gulf Coal Co. was in fact*1114 worth at least $335,000, and the 1,000 shares of stock issued to the petitioner were worth par.
Although the evidence shows that the stock was worth par at the time it was issued to the Meads, and the physical property was worth at least $335,000, the $100,000 paid for the option does not represent an additional cost to petitioner of physical property alone. It represents cost to petitioner of all the properties acquired *607 from the East Gulf Coal Co. No evidence was introduced to show how the $100,000 should be apportioned between the physical properties, the sublease and the rights under the contract with the Virginian Railway Co., and to certain rents. The fact that the physical properties were worth at least $335,000 at the time they were acquired by the petitioner does not furnish any basis for allocating the total amount paid for the option to such properties. The lands which were leased were very valuable coal lands and the acquisition of a lease on such lands might well have been worth $100,000 to petitioner without the acquisition of the mining equipment already on the lands. There is absolutely no evidence from which we could find what, if any, portion of*1115 the $100,000 should be allocated to the physical property. In the absence of such evidence, the determination of the respondent as to the basis for depreciation must be sustained.
(b) As to the second point raised on the depreciation issue, whether steel rails in a mine depreciate at the rate of 10 percent a year, as contended by respondent, or at 12 1/2 percent, as the petitioner urges; we are of the opinion that the more rapid depreciation in petitioner's mines is sustained by the evidence, and have so found. Petitioner's witness, Nowlin, its secretary-treasurer, calculated the average life of a steel rail in petitioner's mines - with their curves, grades, slate falls, etc. - was six years. The petitioner had some $25,000 of tracking and its replacement was about $4,000 a year. It would appear, therefore, that depreciation on steel rails in petitioner's mines was about 16 percent, certainly as much as the 12 1/2 percent claimed. We do not think the rate of 12 1/2 percent unreasonable for the years before us.
2. We come now to the question of whether petitioner sustained a loss of $82,438.26 in 1925 on the exchange of stock resulting from the reorganization of the Interstate*1116 Coal & Dock Co., a Maine corporation, in which petitioner was a stockholder to the extent of 2,083 shares. If this transaction was a "reorganization" within the meaning of the 1926 Revenue Act, of course, no loss on such an exchange will be recognized to the petitioner. See section 203(b)(2), set out in the margin. 1 If such an exchange does result in a taxable gain or loss, the petitioner's valuation of the stock received in exchange is sustained by our finding that it was worth at that time not more than $40 a share. The facts of the transaction may be summarized as follows: Petitioner was a stockholder of the Maine corporation. The Maine corporation owned 9,600 of the total 13,516 shares of the Low Volatile Consolidated Coal Co., a West Virginia*608 corporation, or something over two thirds of its capital stock. The assets of the Maine Co. were mortgaged to a bank on October 10, 1922. On May 9, 1925, the president of the Maine Co. and of its subsidiary, the West Virginia corporation (C. H. Mead being vice president of this company) sent out jointly a circular letter to all stockholders of both companies, pointing out that the mortgagee bank was in need of money and*1117 would shortly commence foreclosure proceedings; that the indebtedness of the two companies consisted mostly of the unpaid purchase price on certain West Virginia mines and that the burden could no longer be carried without "additional financing"; and suggesting, the majority of the stockholders and certificate holders of both companies having so "unanimously voted after full discussion," that "the only practical method of refinancing these companies is through reorganization." The letter also outlined the plan. The mortgagee bank thereupon foreclosed on the Maine Co's. mortgage on June 30, 1925, and at the foreclosure sale the new company, the proposed financial structure of which had been put before the stockholders of the old companies fully in the above mentioned circular letter, purchased the assets for $491,000 pursuant to the plan. The new company was the Low Volatile Coal Co. of Ohio, an Ohio company. The Ohio Co. issued 10,000 shares of preferred stock, to be sold at par; 10,000 more shares of common (no par value) to go as a bonus, share for share, with each share of preferred sold; and 10,000 shares more of common to be distributed to preferred stockholders of the old*1118 Maine Co. and to the minority stockholders of its subsidiary, the old West Virginia Co. Petitioner as a stockholder in the old Maine Co. thereby got 947 shares of the new Ohio Co's. no-par common stock (worth in 1925 about $40 a share) and seeks to show a loss in 1925 measured by the difference in value then of this stock and the cost of the stock held in the old Maine Co.
We are asked to say that this transaction was not "a reorganization" within the meaning of the 1926 Act, the relevant sections of which are set out in the margin. 2 The petitioner points out that *609 only about 68 percent of the new company's stock was owned after the transaction by stockholders of the two old companies, and that of the total shareholders of the old companies only about 80 percent owned stock in the new company. And it argues from this, under the statute's definition of "control" as 80 percent, *1119 that this was not a reorganization under section 203(h)(1)(B). Conceding this without deciding it, the question remains whether this was not a reorganization under subsection (A) of the same provision. The petitioner contends that it does not fall within the definition of "merger or consolidation", but we think otherwise. Only recently, the Supreme Court had occasion to construe this section of the act, and said by way of definition, in :
The paragraph in question directs - "The term 'reorganization' means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation)." The words within the parenthesis may not be disregarded. They expand the meaning of "merger" or "consolidation" so as to included some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words - so as to embrace circumstances difficult*1120 to delimit but which in strictness cannot be designated as either merger or conslidation. * * *
*1121 In that case there was the form of a sale by the old corporation to the new, and what is here important, a distribution of the cash proceeds of the sale (when realized through maturity of notes from the old corporation) to the stockholders of the old corporation. No such thing took place here. Here the new company paid $491,000 for all the assets of the old at the sale, but the only distribution made to the stockholders of the old company and its subsidiary was in stock of the new company. Moreover, such a distribution in the new company's stock was prearranged from the beginning, as the proposal to all stockholders of the two merged corporations made by the majority of such stockholders plainly shows there was a definite plan of reorganization which was carefully carried out.
It seems to us immaterial that there was a foreclosure sale of the old corporation's assets. Foreclosure sales are the common concomitant of reorganizations, and no peculiar significance, as petitioner contends, attaches to this circumstance; in fact, the judicial sale is the usual incident of reorganizations. Cf. *1122 ; ; certiorari denied, ; Morawetz on Private Corporations, § 812. What is essential, however, to constitute a reorganization is continuity of interest from the old corporation into the new, and it is this element which distinguishes a reorganization from a mere sale by the old corporation of its assets *610 for cash and notes to be distributed to its stockholders in liquidation. ;Here the petitioner was a stockholder in the old corporation and became, through a definite and prearranged plan, a stockholder in the new corporation, so that its continuity of interest remained unbroken. , cited by petitioner, is distinguishable on its facts; and the peculiar facts of , also relied on by petitioner, so far as we can see, have no application to the question at issue here. There*1123 a stockholder became a guarantor of the value of certain collateral held by his corporation and was allowed to take as a loss the difference between the amount so guaranteed and the stocks received on distribution of the collateral, the stocks received by the taxpayer having incidentally been substituted for that originally pledged to the corporation by its debtor through a reorganization. To state these facts is to show how remote that case is from the issue here.
In general legal parlance there was a reorganization, and we hold that there was also a reorganization within the meaning of the statute. Consequently, petitioner sustained no recognizable loss through its receipt in 1925 of the new Ohio Co.'s stock in exchange for the stock originally held by it in the old Maine Co. Cf. .
3. One assignment of error remains which need not detain us long: The respondent's allocation of the cost equally between common and preferred shares of the stock bought by petitioner in 1927 in the new Low Volatile Coal Co. The petitioner bought in that year 739 shares of preferred stock of that company, paying approximately $103.66 a share. With*1124 each share of preferred, it received free as a bonus one share of common stock. The petitioner sold 54 shares of the Low Volatile Coal Co. preferred in 1928 at $5,346, or $99 a share.
The petitioner offered evidence of sales of the common stock in January 1926, at $22, and in December 1929, at $34 a share. It was certainly not worth more in 1927 than $40 a shae, its probable value in 1925, and we have so found. It follows, therefore, that the preferred stock was then worth the difference between the amount paid for common and preferred, or about $63.66 a share. This basis of allocation of cost of the 739 shares of common and of preferred stock to petitioner in 1927, should, therefore, be followed, in the calculation of the gain on the 1928 sale.
Reviewed by the Board.
Judgment will be entered under Rule 50.
GOODRICH took no part in the consideration of or decision in this report.
Footnotes
1. SEC. 203. (b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩
2. SEC. 203. (h) As used in this section and sections 201 and 204 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
(i) As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩