Reports of the U.S. Board of Tax Appeals

At the beginning of the negotiations for the retirement of Murray, Steinson abandoned for the time being any thought of proceeding with the erection of a building for the use of the company. No action was ever taken upon the bids received in December, 1920, for constructing such a building. The lot at 3100 West Grand Avenue was not sold, and in the year 1924 the petitioner erected a building upon that property, constructed in accordance with new plans and specifications, and the plans purchased and paid for in the year 1920 have never been used. The total cost of these plans was something more than $5,100, but $5,100 was the amount paid and entered upon the books of the company for the year 1920. Some two or three hundred dollars more was paid to the architect during the year 1921. In making its income and profits-tax return for the year 1920 the petitioner claimed this sum of $5,100 as a loss during that year. The Commissioner disallowed such deduction.

Order of redetermination of deficiencies will be made, (1) giving effect to the elimination of the amount of $1,960.31, interest on United States obligations from corporate income subject to normal tax for the year 1920, and (2) in other respects approving the findings of the Commissioner, on 15 days' notice, under Rule

50.

APPEAL OF TROOST AVENUE CEMETERY ASSOCIATION.

Docket No. 1114. Decided September 29, 1926.

Justin D. Bowersock, Esq., for the petitioner.

A. H. Fast, Esq., for the Commissioner.

Deficiencies aggregating $1,394.36, income tax for 1920, 1921, and 1922, arising from the inclusion in petitioner's income of amounts alleged to be a trust fund for perpetual maintenance.

FINDINGS OF FACT.

The petitioner is a Missouri corporation which owns "Forest Hill Cemetery," at Kansas City, and sells lots for burial purposes.

On May 25, 1914, it executed a trust agreement with the Fidelity Trust Co., now the Fidelity National Bank and Trust Co. of Kansas City, trustee, establishing a trust fund to assure the proper care and attention of the cemetery. At the time of making the agreement it placed certain securities in the fund and agreed to add any gifts or

50144°-27-77

FINDINGS OF FACT.

The petitioner is an individual residing at Shelby, Ohio. The Ohio Seamless Tube Co., hereinafter called the old company, was a corporation organized under the laws of the State of Ohio in the year 1912. Its principal office was at Shelby, Ohio, and it owned and operated a seamless tube plant at that place. On or about December 1, 1916, its capital stock consisted of 17,220 shares of common stock of the par value of $100 each, of which the petitioner owned 235 shares.

In December, 1916, the Ohio Seamless Tube Co., hereinafter called the new company, was organized under the laws of the State of Ohio, with a capital stock of 17,220 shares of preferred stock and 72,780 shares of common stock, each share having a par value of $100.

In December, 1916, the stockholders of the old company contracted with the new company to transfer to the new company all of their shares of the old company and to accept in payment there for one share of the preferred stock and four shares of the common stock of the new company for each share of the stock of the old company. The contract further provided that all the assets of the old company should be conveyed to the new company with the intention that the capital stock of the new company should be supported by the same assets as the capital stock of the old company. Pursuant to the contract of December, 1916, the assets of the old company were conveyed to the new company and the new company assumed all the liabilities of the old company. The new company thereafter owned and operated the same business that had been owned and operated by the old company.

Pursuant to the contract of December, 1916, the stockholders of the old company exchanged their 17,220 shares of common stock, representing all of the stock of the old company, for 17,220 shares of the preferred stock and 68,880 shares of the common stock of the new company. Three thousand nine hundred shares of the common stock of the new company were not issued but were retained by that company and held in its treasury.

The petitioner received in exchange for his 235 shares of the common stock of the old company, 235 shares of the preferred stock and 940 shares of the common stock of the new company. The preferred stock of the new company had, at the date of the exchange, a fair market value of $98 per share, and the common stock of the new company had at that date a fair market value of $55 per share.

The petitioner subsequently purchased 217 shares of the preferred stock and 809 shares of the common stock of the new company for $20,946, and $35,758.25, respectively.

During the year 1919, the petitioner sold 50 shares of the preferred stock and 1,749 shares of the common stock of the new company for the amount of $115,620.

The Commissioner determined that the exchange of the capital stock of the old company for shares of stock of the new company in 1916 did not result in taxable gain to the stockholders of the old company, and that the basis for determining subsequent gain on the sale of the shares of the stock of the new company was the same as for the shares of the stock of the old company, and he has computed the petitioner's gain on the sale of the shares of the stock of the new company made by him during the year 1919 on the basis of the March 1, 1913, value of the shares of the stock of the old company and the cost of such shares of the stock of the new company as were acquired by the petitioner subsequent to the year 1916, and determined that there is a deficiency in tax for the year 1919 in the amount of $11,004.87.

OPINION.

MARQUETTE: The real question presented here is whether or not the petitioner realized taxable gain in the year 1916 from the exchange of his shares of the capital stock of the old corporation for shares of the capital stock of the new corporation. It is not disputed that if that transaction did not result in taxable gain the determination of the Commissioner should be approved. The petitioner however contends that upon the exchange of stock he realized income to the extent of the difference between the March 1, 1913, value of his shares in the old corporation and the value of the new shares received therefor. In support of his contention he cites the cases of United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536. The Commissioner contends that the transaction in question did not result in taxable gain to the petitioner and relies on the case of Weiss v. Stearn, 265 U. S. 242.

The first three cases cited by the petitioner involve facts distinctly different from those in this appeal, and they are clearly not authority for the conclusion which he seeks to impress upon the Board. The Phellis case and the Rockefeller case involved transactions whereby certain corporate assets, not exceeding accumulated surplus, were segregated and passed to individual stockholders, and the value of the segregated thing so received was held to constitute taxable income. In the Cullinan case the gain resulted from a divi