I. REALIZATION OF GAIN OR LOSS.
1. Affiliated Corporations. The sale of parent's stockholdings in an
affiliate terminates the affiliation and results in taxable gain measured
by the difference between cost of the stock and its selling price, unre-
duced by income of subsidiary required to be reported in consolidated
return filed by parent for period of tax year for which affiliated status
obtained. Southwestern Ice & Cold Storage Co-----
(2) Nature of Transaction.
2. Separate Transactions. A brokerage partnership business realized
a profit in tax year from underwriting a new stock issue, but sustained
a loss in following year under an obligation to create an active market
for the same stock. Held, the two agreements represented separate
undertakings and Commissioner properly declined to consider them as
one continuing transaction in which the loss for the following year
might serve to reduce the gain taxable for tax year. Herbert J. Blum 1033
3. Id. Where provisions of a contract, involving the exchange of
stock in one corporation for stock in another as well as the sale of stock
in the second company for cash, are so interdependent that a separation
of the two transactions would annul some of its provisions and defeat its
main purpose, held the contract is not separable and the exchange was
one of stock in the first company for stock and cash in the second, and
gain or loss on the transaction is to be computed under provisions of
sec. 203 (d) (1), Act 1926. First Seattle Dexter Horton National Bank 1242
4. Debts; Transfers in Satisfaction of. An insolvent corporation trans-
ferred property to its creditor in consideration of the cancellation of the
indebtedness; amount of debt exceeded value of debtor's equity in the
property. Held, the transfer constituted a sale giving rise to taxable
gain in an amount equal to difference between the cost of the property,
depreciated as of date of transfer, and amount of indebtedness can-
celed. Dallas Transfer & Terminal Warehouse Co‒‒‒‒
5. Id. Stock Acquired at Less Than Par was accepted by a creditor
at par in payment of an indebtedness. Held, difference between price
paid for the stock and par represents taxable income to debtor. Twin
Ports Bridge Co----
6. Nontaxable Exchange; Excluding Clause. Sec. 112 (b) (1), Act
1928, in reference to exchange of property for property of like kind,
upon which no gain or loss is recognized, expressly excludes stock, and
Commissioner's determination of profit realized from the transfer of
stock and realty for other realty, based on difference between cost
of the stock and its fair market value at date of exchange, is approved.
R. & M. Property Co----
7. Sale or Capital Contribution. Facts proved by the evidence, to-
gether with the conduct of the parties, held, to establish that transaction
by which assets of a partnership were transferred to a corporation was a
sale, not a contribution of additional capital, and results in the realiza-
tion of gain or loss. Abe Ackerman__
8. Sale or Distribution of Assets. Taxpayer declared a dividend pay-
able in the stock of another corporation at an agreed value per share,
which value was in excess of cost of the stock to taxpayer. Held,
distribution was not such a sale or other distribution of property as
would result in taxable gain to taxpayer. General Utilities & Operating
Co______
9. Sale or Dividend. Taxpayer, the only shareholder of U Company,
caused A Company to be organized. U Company transferred assets,
consisting of shares in M Company, to A Company for which A Com-
pany issued all its shares to taxpayer. A Company then liquidated
by distributing its assets, consisting of shares in M Company, to tax-
payer, its only shareholder, and immediately dissolved. Taxpayer then
sold the shares in M Company. Held, A Company may not be disre-
garded, and tax to taxpayer is predicated upon the statutory recog-
nition of a reorganization, liquidation and sale. Evelyn F. Gregory‒‒‒‒‒
10. Id. Commissioner's contention that shares were received as an
ordinary dividend and that total proceeds from their immediate sale
represented a taxable dividend denied and profit only held liable for
tax. Id.
11. Id. In tax year taxpayer sold all the stock of A corporation to B
corporation for cash and the net quick assets of A. Held, facts do not
establish that any part of the cash received constituted an ordinary
dividend received from A corporation and Commissioner's determination
that it constituted part of consideration received for stock sold is sus-
tained. Philip D. C. Ball__
12. Reorganizations; Sec. 203 (h) (1) (A), Act 1926. Taxpayer ex-
changed common stock of A corporation for common stock of B cor-
poration, in a transaction whereby B acquired all the common stock of
A but none of A's preferred stock and A remained in existence. Held,
transaction was not a reorganization within the meaning of the above
section and difference between cost of shares parted with and value of
shares received is taxable gain. Id.
13. Bona Fides. Advances were made to a corporation by its prin-
cipal stockholder for its notes. Later he received stock in cancellation
of the notes, which stock he sold to his son for less than amount of
advances. Held, transaction was bona fide and gave rise to gain or loss.
Estate of L. W. Mallory---.
14. Id. Sale to Establish Loss. Where sale of a chose in action for a
consideration less than amount involved, admittedly made in order to
claim an income tax loss, was shown to have been made in an arm's length
transaction and bona fide, loss resulting is deductible. Ward Ames, Jr__
15. Id. Claim by Commissioner that indebtedness sold had become
worthless in preceding year rejected, on evidence that debtor corpora-
tion recognized the debt as valid and continued to carry it on the books.
Id.
16. Id. Taxpayer, in two successive years, sold stock in a company of
which he was the majority stockholder, to a business associate for purpose
of establishing tax losses. Each time taxpayer repurchased the stock a
few months later for same nominal price for which he sold it. Held the
repetition of the transaction for the second year casts doubt on tax-
payer's good faith for both years, sales were not bona fide and losses
claimed were properly disallowed. Harold F. Seymour___
17. Corporation or Trustees. A corporation sold some of its assets and
received part of the purchase price. Later it transferred the assets to
trustees to deliver them to purchaser and collect balance of purchase
price. Held, pending complete liquidation and distribution to stock-
holders, profits constitute income to the corporation, not to trustees.
Northwest Utilities Securities Corp-----
18. Corporation or Partnership. A partnership contracted for the sale
of securities which it controlled through an option. The partners then
transferred all the firm's assets, including the option and sale contract
to a corporation organized to take over the business in exchange for its
capital stock. Three days after that transfer corporation completed the
sale and collected purchase price. Held, profits resulting from the sale
constituted income to the corporation and not the partnership. A. E.
Hollingsworth----
19. Husband and Wife; Oregon Law. A business owned by taxpayer
and his wife as partners was incorporated but at wife's request stock
of both was issued in husband's name. Under Oregon law wife's sepa-
rate property remains hers until by her own consent she parts with it.
Held, taxpayer was his wife's agent as to her stock and one-half only
of the gain resulting from the sale of all their stock is taxable to him.
W. A. Gracper_--
20. Reclamation Districts; Private and Public Corporations. Under
California law reclamation districts are public corporations and where a
private corporation, owning 80% of the land in reclamation districts, sells
rights of way, levees, etc. to the districts at a profit, the private corpo-
ration realizes taxable gain on the transaction. Kings County Develop-
ment Co---
21. Closed Transactions; Year of Sale. An executory contract of
sale was entered into in one year but title did not pass until tax year.
Held, Commissioner properly included profits from the sale in income
for tax year. Newaygo Portland Cement Co----.
22. Id. Escrow Agreement. Under the terms of an escrow agreement
entered into in connection with the refinancing of a corporation, stock-
holders were to surrender their shares and receive payment from the
agent, shares to be delivered and checks paid on a specified date. Tax-
payer surrendered his shares before the due date and in a preceding
tax year. Held, sale was not consummated until year provided for in
the agreement and Commissioner erred in treating the transaction as
closed in the prior year. Ganson Depew‒‒‒‒‒
II. BASIS FOR DETERMINING GAIN OR Loss.
1. Estates; Sec. 702 (a), Act 1928. The only purpose of sec. 702 (a),
Act 1928 is to permit an estate to elect whether it will settle its tax lia-
bility as shown on a return filed in conformity with regulations effective
at date of filing, but later abrogated, or decline to do so and ask for a
redetermination under provisions judicially determined to be the law at
such filing date. Cavour Hartley, Executor__
2. Id. Where, however, the return was originally filed on the basis
later judicially determined to be the law at date of filing the exercise of
an election would be ineffective and the recomputation of profit derived
upon the sale of property acquired by the estate from the decedent would
be necessarily made on basis which had originally been used. Id.
3. Identification of Lots. Where shares of stock transferred by an
individual to trustees for the benefit of his children cannot be identified
as the same shares received by him from his wife's estate, held compu-
tation of gain or loss upon the redemption of the stock by issuing cor-
poration should be made according to "first acquired, first sold" rule as
set forth in arts. 58 and 600, Reg. 74. T. Pierre Champion_.
4. Short Sales; Transactions on Margin. In respect of short sales of
stock, gain or loss is ascertained by matching the short sale price against
the cost of the covering purchase, even though taxpayer, at same time,
maintains with same broker a margin account containing similar shares
previously purchased. Robert W. Bingham_.
5. Partnership Assets. Basis for Determining Gain or Loss from sale
of property paid into partnership at date of organization is its value at
that time, regardless of its cost to contributing partner. Edward V.
Archbald---
6. Property Acquired by Exchange. A taxpayer bought bonds which
later were exchanged for others having a fair market value less than
cost of original bonds. Bonds received declined in value through March
1, 1913. In 1925 they were exchanged for other securities, which were
subsequently sold for cash. In each exchange the securities were those
of a corporation, a party to a reorganization and were exchanged in
pursuance of the plan of reorganization solely for stock or securities
in a corporation a party to the reorganization. Held, the property re-
ceived in the 1925 exchange having been acquired after February 28, 1913,
upon an exchange as described in sec. 203 (b), Act 1926, basis for com-
puting gain or loss from its sale is same as that of the property ex-
changed. Otto H. Kahn___
7. Id. Held, further, that the property parted with in the 1925 ex-
change having been acquired prior to March 1, 1913, basis for computing
gain or loss is its cost, not the cost of the original securities parted with
in 1912 but rather the fair market value of those securities at the time
of the 1912 exchange. Id.
8. Id. Commissioner's basis for determination of gain or loss upon the
exchange of stock for stock approved for failure of taxpayer to establish
error or offer a more accurate basis. Twin Ports Bridge Co-----
9. Id. Sec. 204, Act 1926. Loss sustained through exchange in a prior
tax year of stock in one company for stock in a successor company was
not an allowable deduction from income under revenue act controlling
for that year. Held, in computing gain or loss from sale in tax year of
stock so acquired, Commissioner erred in decreasing cost by the amount of
loss sustained in the earlier tax year. Philip D. C. Ball__
10. Property Acquired by Gift. Where gift of property made in con-
templation of death was complete and title passed several months before
death of donor, time of acquisition for purpose of computing gain or
loss upon the subsequent sale of the property is date gift became effective,
not date of donor's death. Lettie Snyder_-_-
11. Id. Fact that for estate tax purposes value of the subject matter
of the gift was determined as of the date of donor's death is immaterial.
Id.
12. Property Acquired in Joint Tenancy; Illinois Law. Under law of
Illinois a surviving joint tenant does not take title to decedent's half of
the property by intestacy and sec. 113 (a) (5), Act 1928, dealing with the
acquisition of property "by intestacy" does not apply in determining
basis for computing gain or loss upon sale by survivor of property so
held. Helen G. Carpenter---
13. Id. Double Taxation; Estate and Income Tax. Federal income
and estate taxes differ from each other and are not mutually exclusive
because imposed with respect to the same subject matter. A double tax
under such circumstances is not invalid. Id.
14. Id. Basis for computing gain or loss resulting from sale of real
estate in Illinois acquired in joint tenancy is cost of the property when
acquired, not the cost of half the property plus value at date of death of
one tenant of the other half. Id.
15. Property Acquired by Will. Basis for determining profit on sale of
property acquired by will is value of property at date of testator's death.
Jean Conrad.
16. Sale or Exchange. Taxpayer was formed by three devisees, who
transferred to it the residuary estate of their testator, in consideration
for the issuance to them of all its preferred stock, in proportion to their
respective interests in the estate. By same instrument one devisee also
transferred property owned by him separately, for taxpayer's promissory
note in an amount substantially less than the then market value of the
property. Held, this asset was acquired by purchase, not in an exchange
for stock, and Commissioner properly limited basis for computation of
gain or loss resulting from its subsequent sale to amount of note given
in payment. Poncin Corp--
17. Sale or Reorganization.
Individuals owing two-thirds of the stock
of a corporation agreed to form a new corporation; subscribed cash for
the purchase of its assets and after their purchase organized a new corpo-
ration to which assets were transferred for its stock and the assumption
by it of an indebtedness for which the individuals were liable. Held,
the transaction constituted a sale by the old corporation, not a reorgani-
zation, and basis for determining gain or loss by former owner is cost
of the assets to it. Farmer's Cotton Oil Co___.
18. Vested Remainders. Date of testator's death, not date of distribu-
tion upon termination of particular estate, is time for valuing property
received by remainderman and sold in tax year, Isabel Richardson
Molter__.
19. Id. 1928 Act. Sec. 113 (a) (5) specifically provides that basis for
computing gain or loss upon the sale of property so acquired shall be
the date of distribution, not date of death, and computations for 1928
and subsequent years are governed by its provisions. Mary Colgate____ 506
(2) Determination of Cost.
20. Items of Cost. Remainderman purchased widow's rights in realty
devised to her for life with remainder over, for a consideration consist-
ing of annual payments to be made to her. Held, no evidence having
been offered as to the value of the widow's rights, no part of the pay-
ments to her may be included in cost used to determine gain or loss
derived from the sale of the property by the remainderman in tax year.
Harry C. Kayser_-_-
21. Id. Finance Costs. In computing gain or loss on sale of building,
for purchase and alteration of which bonds were issued, bond discount
unamortized at date of subsequent sale of building may not be treated
as part of the cost of property. East Ninth Euclid Co____.
22. Id. Interest; Carriers. Interest paid during period of construction
on funds borrowed may not be included as part of the cost basis for
determining gain or loss upon subsequent disposition of the property,
although such interest was required to be added to capital cost by the
classification of accounts of the Interstate Commerce Commission as a
basis for fixing interstate rates. Southern Ry. Co-‒‒‒‒‒
23. Id. Cemetery Lots; Reserve for Perpetual Care. Cemetery lots were
sold with assurances that 10% of purchase price would be reserved for
perpetual care. In computing profit from sales taxpayer increased the
cost of the lots by an estimated figure which it claimed represented its
obligation to the perpetual care fund. Held, Commissioner properly
eliminated this addition to cost from the computation. Acacia Park
Cemetery Assn., Inc‒‒‒‒
24. Id. Improvements by Lessee. Cost of improvements by lessee,
made in a prior year, but never included by lessor in income, may not be
used to increase basis upon which gain or loss from sale of the prop-
erty in tax year is to be computed. William Merriam Crane_---
25. Id. Services; Patents. Exclusion by Commissioner of any value
for services of patentee in procuring patent, for purpose of determining
cost of patent sold in tax year, held correct. Helen N. Winchester___
26. Allocation of Cost; Art. 39, Reg. 69. Two classes of stock were pur-
chased for a lump sum at the same time by syndicate of which taxpayer
was a member. Upon sale in tax year of one class of stock, Commissioner
allocated the total cost of the syndicate's stockholdings to the class of
stock retained. There being insufficient evidence to enable Board to make
an allocation of cost to each class of stock, held Commissioner's deter-
mination is approved. Philip D. C. Ball___
27. Id. Commissioner's allocation of cost of original stock among the
stocks owned after taxpayer had liquidated her holdings in one corpora-
tion through accepting the securities of another, made in accordance with
his regulations as amended, held reasonable and is approved.
28. Stock. Advances to a corporation represented by its promissory
notes, subsequently canceled and exchanged for corporation's stock, con-
stitute capital contributions and cost of the stock is the amount of the
debts canceled. Estate of L. W. Mallory__
29. Id. Adjustment for Stock Dividend. Taxpayer, owner of non-
voting cumulative preferred stock, received a dividend payable in voting
common stock. Held, not a stock dividend and in computing gain or loss
upon sale of the preferred stock basis is entire original cost of the stock
sold. Tillotson Mfg. Co-----
30. Id. Redemption of Preferred Stock; Sec. 201 (d), Act 1926.
Dividends were paid to preferred stockholders in prior years out of capi-
tal. Held, in determining gain or loss realized in tax year upon the re-
demption of the stock at par Commissioner properly reduced cost of the
stock by these distributions. De Ver C. Warner_
31. Id.
So held, where preferred stock had been acquired as a gift
and was later exchanged for bonds of same corporation, which were also
redeemed at par. Id.
32. Evidence of Cost. Commissioner's determination of cost approved
for failure to establish error. Watab Paper Co‒‒‒‒‒‒
(3) Determination of Value.
33. Sales Contracts. Fair market value of sales contracts for purchase
of real estate on deferred payment plan, held not in excess of 50% of
their face value at time of sales. Trust No. 5522, Bellehurst Syndicate__
34. Stock. Commissioner's determination of value of stock, approved.
Salt Lake Hardware Co‒‒‒‒.
35. Id. Commissioner's determination that stock exchanged for other
stock had a fair market value at date of exchange of at least par,
approved. First Seattle Dexter Horton National Bank__--
36. Id. Fair market value of stock acquired by gift determined. Wil-
liam F. Harrah---
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