Court Opinion

ID: 4614938
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:31:17.361924+00
Date Added: 2024-06-11T07:54:52.161432
License: Public Domain

ETHEL GARY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  W. W. GARY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gary v. CommissionerDocket Nos. 33355, 33356, 34370, 34371.United States Board of Tax Appeals18 B.T.A. 1204; 1930 BTA LEXIS 2504; February 17, 1930, Promulgated *2504  Petitioners were equal partners prior to and until May 15, 1923, on which date a corporation was organized, to which the partnership assets were transferred in exchange for stock.  Immediately after such transfer, petitioners were in control of the corporation, owning more than 80 per cent of its voting stock, and the amounts of stock owned by them were in proportion to their interests in the partnership assets prior to the transfer.  Held, no taxable gain was derived by the partnership under section 202(c)(3) of the Revenue Act of 1921.  Robert Ash, Esq., for the petitioners.  P. M. Clark, Esq., for the respondent.  TRAMMELL*1204  These proceedings are for the redetermination of deficiencies in income tax as follows: Docket No.PetitionerYearDeficiency33355Ethel Gary1922$197.5333356W. W. Gary19221,630.5834370W. W. Gary19235,470.3434371Ethel Gary19233,857.32The issue is whether or not the transfer of the assets of a partnership in 1923 to a corporation in exchange for its stock gave rise to a taxable profit.  In Docket No. 33355 the parties by stipulation filed December 19, 1929, agreed*2505  that there was an overpayment of tax in the amount of $83.41, and that a final order of redetermination might be entered accordingly, which order was entered under date of December 23, 1929.  In Docket No. 33356 the parties have stipulated that there is a deficiency in the amount of $1,057.32; that a final order of redetermination may be entered accordingly, and that thereupon the agreed deficiency may be assessed and collected immediately.  *1205  In Docket No. 34370 the parties have stipulated that the amount of net income for 1923 as shown by the deficiency letter should be reduced in the amount of $4,473.88 on account of adjustment in connection with settlement of the 1922 case.  FINDINGS OF FACT.  The petitioners are individuals residing at Vicksburg, Miss., and were formerly members of a partnership known as the W. W. Gary Lumber Co., Percy, Miss.  The petitioners were equal members of said partnership, each owning one-half of the assets, prior to and until May 15, 1923.  On May 15, 1923, a corporation known as the W. W. Gary Lumber Co., Inc., was organized with a capital stock of $535,000, the shares having a par value of $100 each.  The assets of the partnership*2506  were transferred to the corporation in exchange for 4,340 shares of its capital stock, having a par value of $434,000.  The stock of the corporation was issued to the petitioners on May 15, 1923, in equal amounts, each receiving 2,170 shares.  The corporation had an authorized capital stock of $800,000, of which $535,000 was issued at date of incorporation.  Of the total amount of stock so issued, $434,000 was issued to the petitioners for the assets of the partnership, and $75,000 was issued to one Fant for himself and his associate Farris, in part for services rendered and in part for cash.  Immediately after the transfer of the partnership assets the petitioners owned more than 80 per cent of the voting stock of the corporation then issued and outstanding.  The corporation issued no other class or classes of stock.  OPINION.  TRAMMELL: The parties have stipulated that there is an overpayment of tax in the amount of $83.41 in Docket No. 33355, and that there is a deficiency of $1,057.32 in Docket No. 33356.  This leaves for our consideration the issued raised in Docket Nos. 34370 and 34371, which involves the question whether the transfer in 1923 of the partnership assets*2507  to the corporation in exchange for stock gave rise to a profit taxable to the petitioners.  The Revenue Act of 1921 provides in the part pertinent here as follows: SEC. 202. (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized - * * * *1206  (3) When (A) a person transfers any property, real personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer.  For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least*2508  80 per centum of the total number of shares of all other classes of stock of the corporation.  The deficiencies which we are here called upon to redetermine result in their entirety from the action of the respondent in including in the petitioners' income the excess of the partnership assets over the par value of the corporation's stock.  The respondent has not filed any brief in these proceedings, nor did his counsel at the hearing suggest any reason as a basis for the action taken.  The only information we have with respect to the respondent's position is the statement contained in the deficiency letters to the effect that the excess of the assets over the par value of the stock was included as partnership income due to the fact that the petitioners "did not have a sufficient credit balance of the partnership assets over the liabilities to be issued at least 80% of the capital stock in the W. W. Gary Lumber Company, Incorporated, as provided in Section 202(c)(3) of the Revenue Act of 1921." We do not known to what extent the partnership assets exceeded the liabilities, but the ground indicated in the deficiency letters for respondent's determination is not sufficient in our opinion*2509  to hold that the transaction was of such a nature that it could result in either a taxable gain or deductible loss under the statute.  In order to come within the provisions of the law above quoted, it is only necessary for the petitioners to show (1) that they transferred property to the corporation and (2) immediately after such transfer they were in control of the corporation, and (3) that the amounts of stock received were in substantially the same proportion as their interests in the property before such transfer.  . The undisputed evidence clearly establishes the essential facts.  The petitioners transferred property to the corporation, to wit, the partnership assets, of which each owned 50 per cent; immediately after such transfer, the petitioners were "in control" of the corporation, within the meaning of that term as defined in the statute, since they owned more than 80 per cent of its voting stock, which was the only class of stock issued, and the amounts of stock received by the petitioners were in exactly the same proportion as their interests in the property before the transfer.  The respondent erred in determining that the*2510  transaction resulted in a profit taxable to *1207  the petitioners.  ;. In Docket No. 33356, judgment will be entered in accordance with the stipulation of the parties.  In Docket No. 34370, judgment will be entered under Rule 50.  In Docket No. 34371, judgment of no deficiency will be entered for the petitioner.