*1068 Where stock, cash, and real estate are exchanged in 1929 for other real estate, gain is recognized on the disposition of the stock.
*436 The Commissioner determined a deficiency of $10,663.37 in the petitioner's tax liability for the year 1929. The petitioner assigns as error the action of the Commissioner in determining that the petitioner realized a profit of $96,716.72 upon the exchange of Borden Company stock, cash, and real estate for other real estate.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Ohio, having its office and principal place of business in Columbus.
In the latter part of 1929 Stanley M. Ross and his business associate, H. C. Moores, owned a number of shares of Borden Company stock which they had acquired in a nontaxable exchange. They also owned certain real estate in Columbus, Ohio, which they had purchased in 1925 for $57,700. This real estate was improved with a 10-family row of houses and two double duplex houses. Ross and Moores desired to dispose of this real estate because it*1069 was in a mixed neighborhood which made renting to white people difficult.
Ross wrote a letter to the Judson Bradway Company, Agents, Detroit, Michigan, dated October 4, 1929, which was as follows:
I, the undersigned, hereby agree to purchase through you as agent the following described property, to-wit:
Lots A and B, Grand River Avenue, between Joy Road and Beverley, having a frontage of 58 feet on Grand River and a depth of approximately 130 feet, and leased to the Schlute-United Incorporated for fifty years, details of which *437 lease I have, situated in City of Detroit, Michigan, and pay therefor, as the entire purchase price, the sum of $275,000 as follows:
$105,000 in Borden Company stock;
$35,000 in equities in Columbus, Ohio, properties, described below, and the balance of $135,000 I agree to pay by taking property subject to the present mortgage of that amount held by the New England Life Insurance Company on said property.
The properties to be traded in are situated in the City of Columbus, County of Franklin and State of Ohio, and consist of a 10-family brick row at 713-31 Buckingham Avenue, Columbus, Ohio, income $280 per month, first mortgage of $13,500, *1070 6 per cent interest, second mortgage $1,307, payable $75 per month.
Also property known as 815-21 Buckingham Avenue, in said city, consisting of two double duplexes, income $210 per month, subject to building and loan mortgage of $2,060.
Ross and Moores thereafter incorporated the petitioner and transferred to it, in exchange for its capital stock, 1,500 shares of Borden Company stock and the real estate in Columbus, Ohio, above referred to. The petitioner exchanged the 1,500 shares of Borden Company stock and the real estate in Columbus, Ohio, for the real estate in Detroit, Michigan, above mentioned, in November, 1929.
The petitioner took the Detroit real estate subject to a mortgage of $135,000 and the other party to the exchange took the Columbus real estate subject to mortgages in the amount of $16,867. At the time of the exchange the fair market value of the 1,500 shares of Borden Company stock was $99,725. The basis to the petitioner for gain or loss on these shares was $2,121.59. In the settlement carrying out the exchange, the petitioner received credit for the following items:
| Unearned insurance premium | $102.37 |
| Accrued interest payable on mortgage on Detroit property | 1,072.50 |
| Rent adjustment | 376.00 |
| Mortgage adjustment | 32.82 |
| Cash | 3,691.31 |
| Borden Company stock | 99,725.00 |
| Mortgage on Detroit property assumed | 135,000.00 |
| Equity in Columbus real estate | 35,000.00 |
| Total | 275,000.00 |
*1071 In determining the deficiency the Commissioner added to income, as shown on the return, $96,716.72 representing profit from exchange of properties. In explanation he stated:
Records disclose that the amount paid by you for the Detroit real estate included Borden Company stock which had cost you $2,121.59. The market value at which you transferred it was $99,725.00; accordingly, the gain was $97,603.41, which has been reduced by the difference in cost of equity in Columbus realty to transferor and value at which it was taken over.
The Detroit real estate was improved with a one-story brick building covering the entire lot and having a wooden floor and a basement. *438 The building, which cost about $40,000, had been built late in 1927 or early in 1928 for the use of the Schulte-United Stores Company. At the time of the exchange it was occupied by the Schulte-United Company under a 50-year lease which provided for an annual rental at that time of $16,920. The lease provided for a change in the rental every 5 years. The property was valued for tax purposes at $128,720 at the time of the exchange.
OPINION.
MURDOCK: The petitioner contends that it exchanged real*1072 estate for other real estate and the transaction is nontaxable under the provisions of section 112(b)(1) of the Revenue Act of 1928. It argues that the nontaxable character of the exchange is not affected by the fact that in the same transaction it transferred stock and cash, assumed an increased mortgage liability and received the benefit of some adjustments. Section 112(a) of the Revenue Act of 1928 states, as a general rule, that upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized. Subdivision (b) of section 112 provides for certain exceptions and is in part as follows:
(b) Exchanges solely in kind. -
(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT. - No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for*1073 investment.
The petitioner argues that the word "solely," as used above, refers only to the property received in the exchange. In this it may be right (see subdivisions (c), (d), and (e)), but we need not decide that question here, for the Commissioner has not recognized any gain upon the excahnge of the real estate in Columbus.
However, in the same transaction the petitioner also exchanged stock. Stock is expressly excluded from the exception contained in section 112(b)(1). If stock were exchanged solely for real estate, the entire amount of the gain or loss would be recognized. The gain or loss would be the difference between the basis for the property exchanged and the fair market value of the property received. Sec. 111. The parties agree that the basis for the stock in question was $2,121.59. We see no reason why the gain or loss upon the exchange of this stock should not be recognized in this case. The only difficulty would be to determine the fair market value of the property received for the stock. If the various items were properly valued by *439 the parties in their agreement, the petitioner has not been overtaxed, for the petitioner received in the*1074 exchange the full market value of the stock. The Commissioner has reduced this value by the basis and has also further reduced it by an adjustment of $886.69 which benefits the petitioner and is not fully explained in the record. The petitioner argues, however, that the values at which the properties were exchanged were not true market values, but were inflated values. It alleges that the fair market value of the Detroit property was $200,000. In attempting to support this allegation, Ross testified that the petitioner's equity in the Columbus real estate amounted to $4,000 only, instead of $35,000, as mentioned in his letter and recognized in the final settlement. He and Moores had been advised that the petitioner could dispose of its Borden Company stock in this exchange tax-free, whereas a sale would involve a 12 1/2 per cent tax on the profit. Therefore, he said they considered that in this transaction the stock represented an expenditure by the petitioner of only $87,000, instead of $99,725, its fair market value. He testified further that he had heard of a sale of property on Grand River Avenue in Detroit for $3,000 a front foot. This property was within 100 feet of the*1075 property which the petitioner had acquired and was improved with a two-story building. He, therefore, multiplied the frontage of the petitioner's property by $3,000, added $40,000 as the value of the building, and arrived at $214,000, which he said would be, apparently, the value of the property. Even with the adjustments claimed, the petitioner paid far more than this amount for the property. Ross' testimony did not indicate that he had any other knowledge of the value of the property which the petitioner had acquired. He admitted that he had no special qualifications for the valuation of real property. Obviously, the petitioner has not shown that the fair market value of the Detroit property was $214,000. Neither do we feel justified in using any other value for this property in the decision of this case than $275,000, the figure agreed upon and used by the parties in a transaction which, so far as we know, was carried out at arm's length.
If, however, we were wrong in using this value of $275,000, the Commissioner would not necessarily be wrong in his determination of the amount of gain to the petitioner from the disposition of the Borden Company stock. If the properties*1076 were put in at inflated values, the Commissioner's determination might nevertheless be right if the amount of inflation in the value of the Detroit property did not exceed the amount of inflation in the Columbus property. If there was some excess of this kind, the Commissioner's determination would require adjustment. The problem of making such an adjustment need not be solved until it arises.
Decision will be entered for the respondent.