Opinion ID: 278976
Heading Depth: 1
Heading Rank: 1

Heading: Basis of the Land

Text: 8 As previously mentioned, the Commissioner found that the land transaction was governed by Section 112(b) (5) 6 of the 1939 Internal Revenue Code, and therefore decided that petitioner's basis for the land was $40,000. Although there was no specific finding on this issue in its opinion, the Tax Court apparently affirmed the Commissioner's valuation. We reverse and remand on this question for the following reasons. 9 Petitioner contends that Section 112 (b) (5) of the 1939 Code is inapplicable to the transfer in question because the amount of stock received by McCord was not substantially in proportion to his interest in the property prior to the exchange as required by the statute. This position is taken because in transferring the property McCord received 400 certificates of indebtedness representing 40% of the certificates issued, whereas prior to the exchange he was 100% owner of the property. Thus petitioner argues that the substantial proportion provision of § 112(b) (5) has not been met. We agree. 10 It is well settled that in order for this section of the 1939 Code to be applied, the substantial proportion requirement must be met. In one instance it was held that a variation of as little as 3½% was disproportionate. 7 Other cases have held similarly and do not require further elaboration. 8 11 Because it was clearly erroneous to sustain the Commissioner's original position concerning applicability of § 112 (b) (5), we reverse the Tax Court on this point, and remand for further evidence to be taken, as hereinafter indicated. 12 In this appeal the Commissioner has taken an entirely new tack, contending that petitioner's basis for the land is $40,000 regardless of the applicability of § 112(b) (5). Thus the Commissioner argues that where securities of the issuing corporation have no readily ascertainable independent fair market value when issued, the issued stock is assigned a value equivalent to the fair market value of the assets acquired in the exchange. 9 Applying that well established principle to this case, the Commissioner now urges, for the first time on appeal, that the securities or certificates issued by petitioner had no readily ascertainable independent value, and therefore the purchase price of the land paid by McCord, $40,000, must be assigned to the certificates. We do not agree that this principle is necessarily applicable to this case. 13 We are fully aware that a decision by the Tax Court may be affirmed on a different theory of law from that relied on in the lower court. However, where such a theory has no basis in the record made up below, the taxpayer is entitled to a hearing to establish additional facts which might affect the result. 10 After exhaustively reviewing the record in this case, we conclude that there is no basis presently in the record upon which the Commissioner's new theory may be supported. No evidence was offered tending to prove the value of the certificates in question. We express no opinion whether such a value can be established, but taxpayer is entitled to that opportunity in view of the change of position on appeal, adopted by the Commissioner, which is completely dependent upon a factual determination, namely, that these certificates do not have an independently ascertainable value. We therefore remand upon this issue to afford petitioner the factual hearing to which it is entitled.