Court Opinion

ID: 9650924
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:56:00.425789+00
Date Added: 2024-06-11T13:19:42.632085
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
The taxpayer, Jackson Securities & Investment Company, in 1928 sold 1,050 shares of cast-iron pipe stock which in January, 1925, at its organization it had taken over from the three Jacksons at $500 per share. The question is whether the cost basis for ascertaining profit or loss in the sale is the price at which the corporation then took it or a much less price which had previously been paid for it by the Jacksons. The government contends that the latter basis is fixed by section 113 (a) (8), 26 USCA § 2113 (a) (8), quoted in the majority opinion because the new corporation got the stock from the Jacksons in such a transaction as is described in section 112 (b) (5), 26 USCA § 2112 (b) (5). Now it is true that the Jacksons transferred the cast-iron pipe stock to the new corporation solely for stock of the latter, and immediately afterwards owned more than 80 per cent, of the new corporation’s stock, and thus were in control of the corporation. If this were all, there would, according to the statutory provisions, be generally no real sale of the pipe line stock by the Jacksons in that transaction, no gain or loss realized by them, and no new cost basis acquired by the corporation. But section 112 (b) (5) contains this exception: “In the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.” The legislative thought is that, if the individuals after the exchange own through their acquired stock the same proportionate interest in the property put into the corporation that they owned before, and also control the corporation, there has been no real sale of the property. Now prior to this exchange F. M. Jackson had 750 shares of the pipe line stock, Mrs. Jackson had 250, and Ervin Jackson had 50. The proportion of their several interests in the whole 1,050, expressed in percentages, was 71.4 per cent., 23.8 per cent., and 4.7 per cent. The new stocks which they received in the transaction were respectively 2,705, 1,175, and 125 shares out of a total of 4,095 issued. The proportion of their stocks in the corporation, and consequently of their interest as stockholders in the 1,050 shares of cast-iron pipe stock, became in percentages 63.3 per cent., 28.4 per cent., and 3.7 per cent., respectively. If the corporation had thereupon distributed its cast-iron pipe stock, F. M. Jackson would have gotten 664.6 shares *22instead of his original 750 shares; Mrs. Jackson 298.2 instead of the 250 she had; and Ervin Jackson 38.8 shares instead of the 50 he had. Remembering that each share represented $500, these figures show that the transaction was a substantial change of interest, an actual sale; or, to put it in the words of the statute, the two, or more persons interested in this cast-iron pipe stock did not each have .substantially the same proportionate interest in the corporation to which they transferred it as they previously hqd in the property which was transferred. 'The District Judge sitting as jury was well'warranted in so finding. The Jacksons should account for gain or loss in selling to the corporation, and the corporation should be accorded a new cost basis as a purchaser of. this stock.
I agree that it was not material whether the Jacksons originally owned the cast-iron pipe stock jointly or separately, since they all transferred it in a single transaction and since the shares were identical in nature and value. The judgment is correct, for the reason that the transaction substantially altered the proportionate interest of the Jacksons in the property which they transferred to the corporation. Two other persons participated in the exchange who before had no interest in the cast-iron pipe stock, and they by this very same transaction acquired interests in that stock through their stock in the new corporation, and the Jacksons in like manner acquired interests in properties contributed by these others. Each particiuant no doubt really and not nominally valued his contribution, and there were real sales to the corporation which the law should and does recognize as such.