*3794 1. Transaction between stockholders and corporation held to constitute a taxable distribution to the stockholders.
2. Respondent's valuation of assets received approved, except as to fixtures and machinery.
*507 These are proceedings for the redetermination of deficiencies in income taxes for the year 1920 in the respective amounts of $933.44, $1,406.65 and $838.57, for Aaron Pomeranz, Abraham Pomeranz and Otto S. Pomeranz. The issues are identical and the proceedings were duly consolidated for hearing and decision. Two questions are presented for decision: (1) Whether the petitioners realized a gain or a loss upon the receipt of the assets of a corporation of which they were stockholders, the business being continued by them as partners, and (2) the value of the assets at date of receipt by the petitioners.
FINDINGS OF FACT.
The petitioners were stockholders in the Crescent Cap Co., a New York corporation. Abraham Pomeranz owned 220 shares, and Otto S. Pomeranz and Aaron Pomeranz each owned 135 1/5 shares of a par value*3795 of $50 each out of a total authorized capital stock of $25,000 or 500 shares.
*508 On October 30, 1920, a meeting of the board of directors of the Crescent Cap Co. passed the following resolution:
Upon motion duly made, seconded and carried, the secretary was directed to spread said notice upon the minutes.
The Chairman then reported that the stockholders and directors of the company had voted to dissolve the company by mutual consent and that all the necessary papers had been drawn and would be filed with the Secretary of State. He stated that it was the duty of the directors of the company to distribute the assets thereof amongst the stockholders. He stated further that he had received an offer from Otto S. Pomeranz, Abraham Pomeranz and Aaron Pomeranz to purchase all the assets, property, fixtures and effects of the corporation and to assume all its present liabilities and pay to the corporation therefor the sum of $24,520.
Upon motion duly made and seconded and after discussion it was unanimously resolved that the corporation accept said offer hereby transfer to the said Otto S. Pomeranz, Abraham Pomeranz and Aaron Pomeranz all of its assets, good will, property*3796 and effects subject to its liabilities for the sum of $24,520, and further resolved that the said sum of $24,520 be distributed amongst the stockholders of the corporation in accordance with the respective stockholdings.
The petitioners paid no money to the Crescent Cap Co. pursuant to the resolution. Instead, each turned in his stock certificate. The three petitioners forming a partnership called the Crescent Cap Co., with an interest in the assets the same as their respective stock interests in the corporation, then received the assets and liabilities of the corporation. The corporation formally dissolved October 31, 1920.
Before transfer to the petitioners, the assets and liabilities on the books of the corporation were as follows:
| Assets | |
| Cash | $966.22 |
| Accounts receivable | 76,666.05 |
| Deposit | 20.00 |
| Petty cash | 19.44 |
| Securities | 250.00 |
| Unexpired insurance | 500.00 |
| Automobiles | 475.00 |
| Furniture and fixtures | 1,500.00 |
| Inventory | 11,500.00 |
| Total | 91,896.71 |
| Liabilities | |
| Loans payable | $9,185.29 |
| Notes payable | 2,000.00 |
| Accounts payable | 22,201.83 |
| Accrued officers' salaries | 10,000.00 |
| Commissions payable | 578.31 |
| Reserve for bad debts | 884.66 |
| Capital stock | 24,520.00 |
| Surplus | 22,526.62 |
| Total | 91,896,71 |
*3797 The opening books of the partnership, Crescent Cap Co., on November 1, 1920, contained exactly the same assets and liabilities, except that the amount of $22,526.62 designated as "Surplus" was called "Reserve for Contingencies."
The respondent, in determining the deficiencies involved in this proceeding, computed a profit to each of the petitioners on the receipt of assets in dissolution based upon the difference between the *509 cost of the stock of the corporation to each of the petitioners and the proportionate interest that each received in the net assets. In determining the net value of the assets the respondent adopted the book values set out above, except that he increased surplus from $22,526.82 to $24,371.62 by increasing the equipment which was carried on the books at $1,500 to $3,793.61, such amount being the cost of $4,138.48 of such equipment reduced by sustained depreciation of $344.87, and by deducting $448.61 depreciation upon automobile.
The equipment in question was purchased in February, 1920, and was carried on the corporation's books at $4,533.73. Such books also reflected a reserve for depreciation of such assets on October 30, 1920, of $862.81, *3798 making a net valuation of $3,670.92. On October 31, 1920, this account was written down to $1,500.
The corporation, Crescent Cap Co., dealt in men's hats and caps, made of silks and woolens. The price of the materials and of the finished goods slumped considerably beginning in the spring of 1920, with the result that customers were reluctant to take goods at contract prices. A considerable amount of the corporation's deliveries of goods in 1920 were refused and some of its customers became financially involved and went into bankruptcy. Of the total amount of $76,666.05 outstanding accounts receivable on October 31, 1920, $7,924.28, became worthless and were uncollected. Of this amount $6,970.19 was written off in 1921 and claimed as a deduction on the return filed by the partnership and $954.09 was written off in 1922. All of the accounts receivable were cleared up in between two to three years from October 30, 1920.
The equipment carried on the books of the corporation immediately prior to October 30, 1920, at a depreciated cost of $3,670.92, consisted of office and showroom furniture and fixtures and factory equipment. Manufacturing was discontinued late in September, *3799 1920, because the cost of manufacturing was too great and it was found preferable to contract for manufacture. The cost of the office and showroom furniture and fixtures in February, 1920, was about $1,500. The cost of the factory equipment at the same time was about $3,000. When manufacturing was abandoned in September, 1920, the factory equipment was offered for sale. It was finally sold to the factory employees for $900, who bought with an understanding that they would form a partnership or corporation and obtain contract business from the Crescent Cap Co. The employees did not get their business started until February, 1920, but received the factory equipment at that time under a prior agreement by Otto S. Pomeranz that it would be held for them at $900. The office and showroom furniture and fixtures were retained and used in the partnership business.
*510 OPINION.
SIEFKIN: The petitioners insist that they did not realize profits in 1920 because they, as individuals, purchased the assets of the corporation of which they were stockholders. The only support for such a contention is the resolution set out in the findings of fact. It is clear, however, that the*3800 recitals of the resolution are at variance with the facts, and that what actually occurred was that each petitioner turned in his shares in the corporation and received a proportionate part of the net assets of the corporation. Under such circumstances the decisions of this Board in ; ; , and the decision of the court in , affirmed in , apply and the petitioners are taxable upon gains measured by the difference between the net value of the assets received and the basis of each petitioner for the stock. The basis is not in controversy and we have left for decision only the net value of the assets received.
The respondent, except for a change in favor of the petitioners in the amount of $448.61 which he allowed as depreciation upon an automobile, and except that he restored to the equipment account an amount of approximately $2,300 which had been written off just prior to the dissolution of the corporation, adopted the accounts of the corporation as carried forward*3801 into the books of the partnership. The accounts receivable were taken by the Commissioner at the amount at which they were shown upon the books of the corporation and upon the opening entries upon the books of the partnership. The petitioners seek to show that the accounts were, in fact, worth about 50 per cent of their face value. The testimony to this effect is rather vague and is based upon the slump in business conditions during the year 1920 considered in connection with cancellation of orders and subsequent determination that certain of the accounts were bad. It is not shown that the cancellation of orders or the return of goods shipped constituted any part of the accounts receivable item shown on the closing accounts of the corporation and the opening accounts of the partnership. Even if it were presumed that such goods were represented in the accounts receivable, there is no evidence as to the amount which would justify us in adopting any definite figure in reduction of the book figure.
With respect to the equipment account, however, it appears that the entire equipment, office and factory, cost approximately $4,500 in February, 1920, about $3,000 being for the factory*3802 equipment and the remainder representing the office equipment. Manufacture was discontinued in September, 1920, and it was apparent at that time that the factory equipment could not be sold for as much as $1,000 *511 and was, in fact, agreed to be sold to the factory employees for $900. Upon a consideration of all the facts, we hold that the respondent was in error in adjusting the net assets on that account by adding $2,293.61 to the equipment account. In all other respects, his action is approved.
Judgment will be entered on 15 days' notice, under Rule 50.