Court Opinion

ID: 4605184
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:49.410888+00
Date Added: 2024-06-11T07:53:08.683730
License: Public Domain

W. A. FARIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Faris v. CommissionerDocket No. 41655.United States Board of Tax Appeals26 B.T.A. 496; 1932 BTA LEXIS 1299; June 22, 1932, Promulgated *1299  1.  Payment of $100,000 made to petitioner by a corporation in virtue of his ownership of its capital stock held to be a taxable dividend and not a distribution of capital.  2.  Under the facts the petitioner's taxable gain on stock sold in the taxable year is determinable under section 204(a)(6) of the Revenue Act of 1924, by using the cost of the assets exchanged by him for the stock, and not its par value when received.  Newman, Saunders & Co. v. United States,281 U.S. 760">281 U.S. 760. Clark A. Milliron, Esq., and E. S. Brashears, Esq., for the petitioner.  Philip M. Clark, Esq., for the respondent.  LANSDON *497  The respondent has asserted deficiencies in income taxes against the petitioner for 1923 and 1924 in the respective amounts of $34,283.67 and $67,463.26.  The petitioner alleges as to the year 1923 that the respondent erred in holding that a certain payment of $100,000 made to him in that year was a dividend out of corporate earnings, and, as to 1924, in holding that he realized a taxable profit from the sale of corporate stock in that year.  This case was consolidated for the purpose of hearing with the appeal*1300  of R. M. Walker, decided this date and reported at 26 B.T.A. 494">26 B.T.A. 494, which involved the same issue of facts and law for the year 1923.  FINDINGS OF FACT.  The petitioner is an individual residing at Los Angeles, California.  Prior to January 3, 1922, he was equal owner with R. H. Walker in a partnership business carried on under the firm name of "Faris-Walker Fifth Street Store," which they had acquired in March, 1915, at a price not shown, from a corporation in which both were stockholders.  On December 30, 1921, this petitioner and Walker organized the Faris-Walker Corporation and later conveyed to it, effective as of January 3, 1922, all of the partnership assets, including good will, in exchange for 20,000 shares of its capital stock and the assumption of all partnership debts.  The authorized capital stock of the corporation was fixed in its charter at 25,000 shares of a par value of $100 each.  Four initial shares of stock were subscribed and paid for by the petitioners at the time of incorporation, and at the time pertinent to our inquiry each owned 10,002 of the total 20,004 shares issued and outstanding.  On August 13, 1923, the corporation procured from*1301  the State Commission of Corporations a permit authorizivg it to "divide, withdraw and pay" to its stockholders "a part of its capital assets, to-wit, the sum of $200,000, in cash" in ratable proportion as governed by their holdings of its capital stock on said date.  Pursuant to that authority the corporation paid to the petitioner in that year the sum of $100,000.  None of the outstanding shares of capital stock at the date of such payment were retired or canceled.  In 1924 the petitioner sold all of his stock in the Faris-Walker Corporation for the sum of $1,500,000, which he received in cash in that year.  In computing his gain or loss on that transaction the petitioner used as a cost basis of the stock its par value on January 3, 1922, when he received it in exchange for his interest in the partnership assets.  In auditing the petitioner's income-tax return for that year, the respondent rejected the petitioner's cost basis for the stock and used the actual cost of his interest in the partnership assets exchanged for it.  *498  OPINION.  LANSDON: In respect to the first issue which relates to petitioner's tax for 1923, we have held contrary to the contention here urged*1302  by him upon the identical facts in the companion case of R. M. Walker,26 B.T.A. 494">26 B.T.A. 494, decided this day.  Consistent with that opinion we now hold against the petitioner on that issue in this case.  Respecting the second issue, the petitioner argues that the basis for determining the cost to him of the 10,002 shares of stock in the Faris-Walker Corporation, which he sold in 1924, should be the value of the assets exchanged for such stock at the time the corporation was organized in 1922.  Under the facts shown, the transaction is governed by the mandatory provisions of section 203(b)(4) and 204(a)(6) of the Revenue Act of 1924. 1 The petitioner and his partner, Walker, together owned in equal proportion all of the partnership assets which they turned over to the corporation in exchange for its capital stock at the time of its organization in January, 1922.  Immediately after this exchange these partners were in absolute control of the corporation owning its entire stock issue in exact proportion to their prior interests in the partnership.  In no respect was that ownership changed or varied until the petitioner sold has interests in August, 1924. *1303  In consideration of these facts the respondent determined that the cost to the petitioner of the stock sold was $460,493.94.  In the absence of any showing of a different or greater cost to petitioner of his interest in the partnership assets which he *499  exchanged for said stock, the determination of the respondent must be sustained.  D. O. James Mfg. Co.,17 B.T.A. 205">17 B.T.A. 205; Grain King Mfg. Co.,14 B.T.A. 793">14 B.T.A. 793; Haas Building Co.,22 B.T.A. 528">22 B.T.A. 528; and Newman, Saunders & Co. v. United States,281 U.S. 760">281 U.S. 760. *1304 Decision will be entered for the respondent.Footnotes1. SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.  * * * (b)(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but 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.  SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e) or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made.  If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange.  This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it. ↩