C. G. Meaker Co. v. Commissioner

C. G. Meaker Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Ivanhoe Foods, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent C. G. Meaker Co. v. Commissioner Docket Nos. 25290, 25899 United States Tax Court 16 T.C. 1348; 1951 U.S. Tax Ct. LEXIS 161; June 14, 1951, Promulgated *161 Decision will be entered under Rule 50. Meaker owned capital stock of Ivanhoe and for 16 years had leased certain warehouse premises owned by Ivanhoe. Meaker transferred the stock to Ivanhoe in exchange for a further 10- year lease commencing October 1, 1945. Respondent, in his notices of deficiency, valued the lease to Meaker at $ 45,900 and valued the stock to Ivanhoe at $ 130,000. At the hearing, respondent argued that the value of the lease and the stock were the same, viz., not less than $ 81,000 and not more than $ 82,332.27. Held, the value of the lease was $ 81,000 and the value of the stock was $ 62,718. Held, further, the $ 62,718 was taxable income to Ivanhoe in its fiscal year ending September 30, 1946. Ralph W. Levinson, Esq., and F. Robert Gilfoil, Esq., for the petitioners. Sheldon V. Ekman, Esq., for the respondent. Rice, Judge. RICE *1348 These proceedings were consolidated for hearing and determination. Docket No. 25290 involves deficiencies determined in income taxes of petitioner C. G. Meaker Co., Inc., for the calendar years 1943, 1944, and 1945 in the amounts of $ 10,175.73, $ 6,449.41, and $ 6,555.93, respectively, and in declared value excess-profits tax for 1943 of $ 3,264.06. Error is alleged only with respect to the determination for 1945, but because of alleged net operating loss carrybacks, the years 1943 and 1944 are also in issue. Docket No. 25899 involves a deficiency determined in income tax of petitioner Ivanhoe Foods, Inc., for the taxable year ending September 30, 1946, in the amount of $ 33,339.47. These cases involve an exchange of property for property (capital stock for a 10-year lease) and the subsequent sale or assignment of *1349 such lease during the same taxable year. The parties and the respondent valued the capital stock and the 10-year *163 lease in different amounts with different income tax consequences, so that the questions to be decided are: (1) What are the values of the capital stock and the 10-year lease at the time of the exchange; and (2) Was the consideration received by Ivanhoe (capital stock) for the lease taxable in the fiscal year ending September 30, 1945, when the lease was signed, or in the year ending September 30, 1946, when the lease took effect. In its 1945 tax return Meaker reported a capital gain of $ 86.23 on the exchange of property and claimed a loss of $ 47,775 on the sale or assignment of the lease. In determining the deficiencies against Meaker, respondent disallowed the loss and determined that a gain of $ 38,350 was realized. In determining the deficiency against Ivanhoe respondent valued the capital stock received by Ivanhoe at $ 130,000 and included this sum in its taxable income for the fiscal year 1946. FINDINGS OF FACT. Petitioner C. G. Meaker Co., Inc., (hereinafter referred to as Meaker) is a New York corporation, incorporated in 1913, with offices at 28 Garden Street, Auburn, New York. It filed its tax returns for the periods here involved with the collector of internal revenue*164 for the twenty-first district of New York. Petitioner Ivanhoe Foods, Inc., (hereinafter referred to as Ivanhoe) is a New York corporation, incorporated in 1929, with offices at 12 Cottage Street, Auburn, New York. It filed its tax returns for the period here involved with the collector of internal revenue for the twenty-first district of New York. Ivanhoe was formed to take over the Ivanhoe mayonnaise division of Meaker's business, and Ellis Meaker, son of C. G. Meaker, became the president of Ivanhoe. At the time of Ivanhoe's incorporation in 1929, Meaker transferred to Ivanhoe the assets of the mayonnaise division of Meaker, together with certain farm properties and equipment, in exchange for $ 200,000 in cash and 4,000 units of Ivanhoe's stock. Each unit consisted of three shares of stock, one share of common stock, one share of Class A stock, and one share of preferred stock. Shortly thereafter, equipment valued at $ 1,606 was transferred by Meaker to Ivanhoe in exchange for 1,606 shares of common stock of Ivanhoe. Meaker thus held 4,000 shares of Ivanhoe's preferred, 4,000 shares of Class A, and 5,606 shares of common stock. The preferred stock of Ivanhoe is no par value, *165 $ 3.50 cumulative dividend stock entitled to first preference of $ 50 to assets upon liquidation, and is entitled to vote after default of eight quarterly dividends. The Class A stock is no par value, $ 1 noncumulative dividend *1350 stock, and has full voting power with common stock. After common receives $ 1 per share dividends, Class A stock participates equally with common in any additional dividends. Class A stock is entitled to $ 25 preference per share over common upon liquidation and participates equally with common in remaining assets after common has received $ 25 per share. The common stock is no par value stock and carries one vote per share. Meaker set up its Ivanhoe stock on its books at $ 50 per 3-share unit. This value included good will. Other 3-share units were sold to the public at that time and Ivanhoe received $ 50 a unit therefor. From January 1, 1939, until Meaker transferred its Ivanhoe stock for the lease, Meaker owned 3,060 2-share units of Ivanhoe's stock, consisting of one share of preferred and one share of Class A stock each, and 5,606 shares of Ivanhoe common stock. Its cost on its books for said stock was $ 129,913.77. At a stockholders' *166 meeting of Ivanhoe in February 1945, C. G. Meaker and Charles L. Stryker, president and treasurer, respectively, of Meaker, and directors of Ivanhoe, were not re-elected to the board of directors of Ivanhoe. Some question arose as to whether Ellis Meaker was legally entitled to vote certain stock at that meeting and, as a result thereof, Meaker instituted court action against Ivanhoe for an audit of the books and records of Ivanhoe. From April 1, 1929, to March 31, 1939, Meaker occupied certain warehouse premises belonging to Ivanhoe at 101 Seymour Street, Auburn, New York, under a written lease for 10 years at an annual rental of $ 6,600. The property consisted of 53,000 square feet of floor space and included use of connecting railroad sidings and covered loading docks. The buildings were of brick and iron construction. From April 1, 1939, Meaker continued to occupy the premises on the same terms on a year-to-year basis without a written lease until October 1, 1944, when the rent was reduced by $ 12.50 per month, and thereafter until October 1, 1945, Meaker paid its rent in advance as of the first of each month. On August 30 or 31, 1945, Meaker received a written notice from*167 Ivanhoe, via registered mail, that Meaker would be required to vacate the warehouse premises on October 1, 1945. Efforts to find other suitable warehouse space were of no avail, and Meaker began negotiations with Ellis R. Meaker, president of Ivanhoe, looking toward a new lease. Ivanhoe was willing to enter into a new lease only on condition that Meaker turn over all its stock of Ivanhoe and discontinue the pending legal action against Ivanhoe. Ivanhoe was not interested in a cash consideration for the lease. During the negotiations, Ellis R. Meaker frequently threatened to put Meaker "out on the street on October 1." *1351 On the afternoon of September 28, 1945, Ellis R. Meaker wrote a letter to Meaker, at the urging of Meaker's attorney, which reads as follows: We will consider an offer from you to lease the part of our property now occupied by you, for a ten year term for the sum of $ 130,000.00. On the same night a stipulation of discontinuance of Meaker's legal action was signed by the parties. Before the following morning, Ellis R. Meaker withdrew whatever offer the letter may have evidenced. Meaker never offered $ 130,000 cash for the lease. Ivanhoe did not consider*168 the above letter to be an offer, and would not have accepted $ 130,000 cash for the lease had it been offered by Meaker. Ivanhoe at all times wanted only the stock held by Meaker, and never seriously considered a cash transaction. Meaker offered to pay $ 65,000 for a 5-year lease. On September 30, 1945, a lease was entered into between Ivanhoe and Meaker "for and during a term of ten (10) years from the 30th day of September, 1945, which term will end the 30th day of September, 1955." The lease reads in part as follows: * * * * The C. G. Meaker and Company, Inc., the party of the second part, agree that they will pay to the said party of the first part, the Lessor, for the use of said premises during said period of ten (10) years, the following: Three thousand sixty (3,060) shares of Preferred Stock in the Ivanhoe Foods, Inc.; Three thousand sixty (3,060) shares of Class A stock in the Ivanhoe Foods, Inc.; Five thousand six hundred six (5,606) shares of Common Stock in the Ivanhoe Foods, Inc.; and that said stock shall be properly endorsed pursuant to the proper and duly authorized resolution of the C. G. Meaker Co., Inc., and said stock shall be delivered to the party of the first*169 part as soon after the time of signing this Lease, as may be practical, and that stamp taxes connected with the transfer of said stock shall be paid by the C. G. Meaker Company, Inc. It is understood and agreed that any dividends which may become due and payable on Ivanhoe Foods, Inc., stock before named, between the time of signing of this Lease and the time of actual transfer of such stock are to be retained by said Ivanhoe Foods, Inc. * * * * (5) The Lessor agrees that the Lessee may sublet said premises or any portion thereof, or assign this Lease or any interest therein to any tenant to whose occupancy Lessor can offer no reasonable objections based on Lessor's adjoining occupancy, or insurance contracts. * * * * (16) It is also mutually understood and agreed that in case the premises covered in this Lease are destroyed by fire or the party of the first part shall dissolve or become bankrupt, then and in that event the party of the first part shall pay to the party of the second part the yearly rental of Six thousand dollars ($ 6000.00) during the unexpired term of this Lease. (17) It is also mutually understood and agreed that the party of the second part may cancel this Lease*170 by notifying the party of the first part in writing six months prior to the time of said cancellation, and in case this Lease is cancelled the party of the first part shall pay to the party of the second part the yearly rental of Six thousand ($ 6000.00) dollars per year for the unexpired *1352 term of this Lease. It is understood and agreed between the parties to this Lease that the cash refunds payable by Lessor to Lessee in the event of cancellation shall be accelerated by Lessor so that all sums are payable in cash in time for final dissolution of the Lessee as a Corporation, if that eventuality occurs. (18) Lessor agrees to furnish a corporate surety bond which will indemnify Lessee to the extent of 75% of any cash refunds in the event of bankruptcy of Ivanhoe Foods, Inc. * * * * On September 30, 1945, Meaker was in possession of the warehouse premises under its year-to-year lease which began October 1, 1944, and expired September 30, 1945. The effective date of the 10-year lease signed on September 30, 1945, was October 1, 1945, and not before. Meaker transferred its Ivanhoe stock to Ivanhoe on December 3, 1945, and the transfer was recorded on Ivanhoe's stock books as*171 of December 3, 1945. The indemnity bond required by paragraph (18) of the lease was dated November 23, 1945, and paid for by Ivanhoe's check of November 7, 1945. The value of the stock paid by Meaker for the lease constitutes income to Ivanhoe for the fiscal year ended September 30, 1946, and is properly taxable in that fiscal year. On December 18, 1945, Meaker sold its wholesale grocery business to Empire Foods, Inc. Two separate documents were entered into between Meaker and Empire -- one for the sale of the business and the other for the assignment of the lease. The agreement between Meaker and Empire relative to the sale of the business provides in part as follows: 5. The parties hereto acknowledge that the seller herein, by a separate instrument, and for a separate consideration, has assigned to purchaser its lease with Ivanhoe Foods, Inc., to the real property occupied by this wholesale business. The assignment of Meaker's lease to Empire reads in part as follows: NOW, THEREFORE, in consideration of the sum of $ 78,975.00, 1 payable by the assignee herein to the assignor herein in installments in the manner following: * * * * *172 The value of $ 81,000 placed on the lease by Empire was arrived at by Empire and Meaker in an arm's length transaction and represents the fair market value of the lease alone. During 1945 two-share units of Ivanhoe stock, consisting of one share of preferred and one share of Class A, were sold at $ 15 per unit. On October 1, 1945, Ivanhoe had outstanding 13,551 shares of preferred, 13,551 shares of Class A, and 13,473 shares of common stock, *1353 of a total book value of $ 290,823.27. Dividends on the preferred stock were in arrears in the amount of $ 39.87 per share on September 30, 1945, for a total of $ 540,346.13. On October 1, 1945, the common stock of Ivanhoe had a fair market value of $ 3 per share. On October 1, 1945, the fair market value of a two-share unit of Ivanhoe stock, consisting of one share of preferred and one share of Class A, was $ 15. The fair market value of the shares of Ivanhoe stock exchanged by Meaker for the 10-year lease was $ 62,718 and the fair market value of the lease was $ 81,000. OPINION. Subsection (a) of section 111 of the Internal Revenue Code provides that "The gain from the sale or other disposition of property shall be the excess of *173 the amount realized therefrom over the adjusted basis * * *." Subsection (b) provides that "the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." Regulations 111, section 29.111-1 provide: * * * Except as otherwise provided, the Internal Revenue Code regards as income or as loss sustained, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property which is received. The fair market value of property is a question of fact, but only in rare and extraordinary cases will property be considered to have no fair market value. * * * Respondent argues that the value of the lease exchanged for the capital stock of Ivanhoe is the fair market value of the stock as of the time of the transaction involved herein. Meaker argues that the value of the stock is not binding upon it as it received a lease for 10 years and not*174 the stock as a result of such transaction. Respondent attempts to meet this argument by stating in his brief that even if the lease and not the stock be considered the property received by petitioner Meaker, within the meaning of section 111 (b), the value of the lease is equal to the value of the stock which Meaker surrendered to Ivanhoe in payment for the lease. Respondent further argues: Reduced, then, to fundamentals, if the lease was exchanged for the stock and the stock for the lease, it is impossible to derive any other conclusion from the facts than that the market value of the stock was equal to the market value of the lease. Portland Damascus Milk Co., 22 B. T. A. 1236, 1238 (1931). While, in general, it is true that properties exchanged for one another in an arm's length transaction can be assumed to be of equal value, such *1354 is not necessarily always the case. In Portland Damascus Milk Co. the issue resolved around the basis for allowing depreciation on a leasehold. The Court said at page 1238: * * * Cost is the basis, but as stock was issued rather than cash paid, the value of the stock at the time must be determined. *175 The only witness testifying on this matter was produced by the petitioner and he was emphatic that the stock was worth par and that the leasehold was of a value at least equal to the par value of the stock, viz., $ 56,250. This testimony was not weakened on cross-examination, and must prevail unless for other reasons the cost must be placed at a different figure. * * * Ordinarily it is fair to assume that, when two taxpayers exchange property for property in a business transaction, each taxpayer regards itself as getting its money's worth and the same value for tax purpose is placed on the two pieces of property exchanged. However, there is nothing in the statute or in the regulations which precludes us from placing a different valuation on the lease and the stock transferred for it, if the facts justify such a result. See Pierce Oil Corporation, 32 B. T. A. 403, 429 (1935); Elverson Corporation, 40 B. T. A. 615 (1939), affd. (C. A. 2, 1941), 122 F. 2d 295; and Estate of Isadore L. Myers, 1 T. C. 100, 111 (1942). In this case we have an arm's length transaction*176 in the sense that no element of gift was present and in the sense that neither petitioner was attempting to help the other reduce its tax liability. On the other hand, it was not an arm's length transaction in the ordinary sense because of the emotional feelings which had been generated by the family dispute and because of the undercurrents flowing from the legal maneuverings of the parties. Ivanhoe had been sued by Meaker for an accounting and the suit was still pending. Its outcome and the eventual control of Ivanhoe was uncertain. This put pressure on Ivanhoe and its president. On the other side of the picture Ivanhoe had threatened to put Meaker out on the street on October 1, 1945, and Meaker was unable to find any other building where it could house and store its merchandise which was valued at that time, according to the testimony, at $ 130,000 for the merchandise in the warehouse with $ 130,000 more "rolling in." This put pressure on Meaker. Ivanhoe would take no cash for the lease but insisted that Meaker give up the stock or quit the premises. Meaker was willing to pay $ 65,000 cash for a 5-year lease and there was testimony that it might have been willing to pay *177 $ 130,000 cash for a 10-year lease. On these facts it is clear that the parties were not dealing in an arm's length transaction in its ordinary business sense. The officers of both petitioners were under emotional strain and acted in a manner which they quite probably would not have, if they had been dealing with other parties. Ivanhoe wanted the stock in preference to $ 130,000 cash even though the stock was worth less. Meaker was willing to pay $ 65,000 *1355 for a 5-year lease and might have been willing to go as high as $ 130,000 cash for the 10-year lease, rather than give up its stock in Ivanhoe, irrespective of the market value of the stock. This was no ordinary business transaction where it is fair to assume that the properties exchanged had the same value for tax purposes. To the contrary, if the fair market value of the lease and the stock were identical, as contended by the respondent, it would be a remarkable coincidence. A generally accepted definition of fair market value is the price at which a seller, willing to sell at a fair price, and a buyer, willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. It is a question of*178 fact to be determined from all of the evidence. Elverson Corporation, supra. Meaker called two real estate brokers of Auburn, New York, for their expert opinions as to the value of the lease. The first broker testified that in his opinion the fair market value of the properties in question was $ 13,000 a year based upon a $ 370,000 replacement cost less depreciation of $ 240,000 resulting in a value of $ 130,000 on which a return of 10 per cent should be realized. The witness gave consideration to the conditions of the buildings, the location of the property with respect to railroad and highways for truck transport, the particular construction of the buildings for the purpose for which they were used, the available railroad siding and loading docks, and the scarcity of similar warehousing space in or near Auburn, in 1945. The second broker testified that he had been assigned by Empire Foods, Inc., (the assignee of the lease from Meaker) to show the same property for rent for $ 12,000 per year for the unexpired portion of the lease. He also testified that about 47,000 or 48,000 square feet of the premises had been rented to others by Empire Foods*179 and that he was holding the vacant portion (approximately 5,000 square feet) for a rental of $ 1,500 a year. He also stated that he had had an offer of $ 1,200 a year for said vacant space but agreed on cross-examination that, generally speaking, you could get proportionately more rental for a small portion of space than you could for a much larger space such as 50,000 square feet. This witness did not know how much rental the then tenants were paying to Empire Foods. Meaker had been leasing the warehouse building from Ivanhoe for approximately 16 years and had paid an annual rental of $ 6,600 until October 1, 1944, when the rent was reduced $ 150 a year. This reduced rental continued until the new lease was entered into. The new lease contained a provision that if the lease was cancelled Ivanhoe would pay Meaker a yearly rental of $ 6,000 per year for the unexpired term of the lease. On December 18, 1945, Meaker sold its wholesale grocery business to Empire Foods, Inc., and assigned its lease to Empire in consideration of the sum of $ 78,975. *1356 On the basis of the whole record in this case, we have found as a fact, and we conclude that the fair market value of the lease*180 received by Meaker in exchange for its Ivanhoe stock was $ 81,000. In arriving at this conclusion, we have given consideration to the testimony of Meaker's witnesses, the yearly rental paid by Meaker to Ivanhoe over a 16-year period, the value placed on the lease by Empire Foods when Meaker assigned the lease to Empire, the condition of the building, its construction, and the scarcity of similar warehousing space in or near Auburn, New York, in 1945. With respect to the fair market value of the Ivanhoe stock, respondent adduced expert testimony to the effect that on October 1, 1945, it was worth not less than $ 81,000 and not more than $ 82,332.27. Respondent argues that those valuations are supportable in a number of ways. The first method is by reference to the book value of Ivanhoe stock which appeared on the books and the balance sheet of Ivanhoe at $ 290,823.27. This represented the book value of 13,551 shares of preferred, 13,551 shares of Class A, and 13,473 shares of common outstanding. In 1945 a two-share unit, consisting of one share of preferred and one share of Class A, was selling at $ 15 per unit. Respondent applied the price of $ 15 per unit to the 13,551 units*181 outstanding and arrived at a value of $ 203,265. He deducted this figure from the total book value of $ 290,823.27 and arrived at a remainder of $ 87,558.27 from which he concluded this amount was attributable to the 13,473 shares of common stock, or a value of $ 6.4988 per share. He then applied such valuations to the 3,060 units and 5,606 shares of common which Meaker transferred to Ivanhoe and concluded that their fair market value was $ 82,332.27. Ivanhoe argues that the value of the stock transferred for the lease was $ 45,900 determined by multiplying by $ 15 the 3,060 two-share units received by Ivanhoe. Ivanhoe argues further that arrears on the preferred stock were $ 39.87 per share at September 30, 1945, for a total of $ 540,346.13. This was in excess of the surplus of the company by $ 378,626.38. Ivanhoe also pointed to the fact that in addition to dividend arrears the preferred stock is entitled to $ 50 preference and that Class A stock was entitled to a $ 25 preference over the common stock. It also contends that the company would have to earn a total of $ 1,404,951.38 (over and above income and franchise taxes) before the common stock could receive anything and*182 that, in view of the poor earnings record of the company in the 15 years prior to September 30, 1945, the common stock could not be considered to have any fair market value. Ivanhoe argues, finally, that the "blockage rule" must be invoked in determining the fair market value of the stock. It states, on brief, that the prevailing market is for a normal volume of shares of its stock; that the placing of 3,060 two-share units of this stock in the *1357 normal market would result in a lowering of the price obtainable for these shares; and that the amount by which the figure of $ 45,900 (which is the fair market value contended for by Ivanhoe) would be decreased by the application of the blockage rule is a question for judicial determination. Ivanhoe's petition on this issue is vague and uncertain. Ivanhoe cites us no authority for the proposition stated, and, more important, it adduced no evidence at the hearing with respect thereto. The record is silent as to how much, if any, the fair market value of the stock should be reduced by the application of the blockage rule. We, therefore, conclude that the "blockage rule" is inapplicable. Meaker argues that respondent's computation*183 of the book value of Ivanhoe's stock is erroneous because the balance sheet used by respondent showed a value for the stock subscription account of $ 10.565. Meaker says that unrecorded stock subscriptions of $ 47,204.65 for Ellis Meaker and $ 3,374.50 for one L. S. Sawyer, or an additional stock subscription of $ 50,579.15, should have been added to the amount used by respondent. Meaker contends that this would have increased the book value of the stock to $ 341,402.15, and, using the same method of computation used by respondent, the common stock would have had a book value of $ 10.2529 per share. Meaker finally concludes that the fair market value of the Ivanhoe stock was at least $ 103,377.75. The common stock carried voting power which, of course, carried with it some value in a going concern. While the dividend history of Ivanhoe was not encouraging and arrearages in preferred dividends made it unlikely that any dividends would be paid on common in the foreseeable future, the voting power vested in the common, carrying with it the power to determine corporate policies, elect members of the board of directors, and determine compensation of officers and employees, would give*184 it some value. Respondent's expert witness placed the value of the common stock at approximately $ 6.50 per share. In arriving at such figure he studied the financial structure of companies in the same general line of business as Ivanhoe and also studied the financial condition of a group of companies not in the same business but which were comparable, from a financial standpoint, to Ivanhoe. Such study and analysis led him to a fair market value of approximately $ 6.50 a share for such common stock. We are of the opinion that the valuation of the common stock by the respondent is too high. From a careful study of all of the evidence in this case, including the expert testimony of respondent s witness, the basis upon which such testimony was founded, the voting power of the common stock, the arrearages and dividends on the preferred stock, the preferential position of the preferred and Class A stock over the common stock upon liquidation, and the other relevant facts, we conclude that the fair market value of the two-share units was, on October *1358 1, 1945, $ 15 per unit, and the fair market value of the common stock on that date was $ 3 per share, or a total of $ 62,718*185 for the stock acquired by Ivanhoe. Ivanhoe, on brief, raises the issue that since Ivanhoe merely received its own capital stock for the lease, it did not receive any taxable income nor realize any gain or loss. It states as a proposition of law that the accepted interpretation of such transactions are to the effect that no gain or loss is realized on the purchase by a corporation of its own stock. It cites section 29.22 (a) - 15 of Regulations 111 and argues: In the instant case we do not have a corporation dealing in its own stock as it would the shares of another. It acquired the stock for the purpose of putting an end to a dispute between the management of the corporation and the holder of a fairly large block of its stock. That the consideration paid therefor was not cash but was, instead, a lease for a term of ten years does not alter the true nature of this acquisition. Ivanhoe goes on to argue that it underwent, in effect, a partial liquidation and that the only beneficiaries of the transaction were the remaining stockholders. The answer to such an argument is twofold. First, Ivanhoe did not plead such issues in its petition and they are, therefore, not properly before*186 this Court. Second, if a corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Meaker had been leasing the buildings in question from Ivanhoe for approximately 16 years and had paid a cash rental during the entire time. The transaction in question is similar to the lease arrangements in prior years with the exception that instead of cash being the commodity exchanged for the lease, on this occasion the stock of Ivanhoe was used as a medium of payment. The situation was exactly as it had been in prior years and Ivanhoe must treat its own shares of stock as the equivalent of cash. Trinity Corporation, 44 B. T. A. 1219, affd. (C. A. 5, 1942), 127 F. 2d 604, certiorari denied, 317 U.S. 651 (1942). See Lencard Corporation, 47 B. T. A. 58. Ivanhoe also contends that the lease was consummated on September 30, 1945, and that if it is determined that rent income was received by *187 Ivanhoe, it was received in the fiscal year ended September 30, 1945, and not in the fiscal year ended September 30, 1946, as contended by respondent. It relies, for this proposition, on Commissioner v. Lyon (C. A. 9, 1938), 97 F. 2d 70. That case involved a lease which provided that a cash payment of $ 75,000 was to be made at the commencement of the 10-year lease on November 1, 1919, and that it should be included in the amount of total rental ($ 870,000) for the full 10-year term. The rent was payable in monthly installments of $ 7,000 in advance on the first day of each *1359 month during the first 5 years and $ 7,500 in advance on the first day of each month for the last 5 years. It was also provided that the $ 75,000 would be repayable by the lessor only on termination of the lease otherwise than by default of the lessee. The $ 75,000 was also to be applied on the rent for the last 10 months of the term if the lessee fully performed the covenants and agreements in the lease. The Court held that the $ 75,000 was taxable income to the lessor in the year in which it was received and said at page 73: There seems no room for doubt but that*188 where under the terms of a lease a sum is paid on the execution thereof entirely without restriction as to its disposition it is taxable in the year of its receipt. * * * Ivanhoe argues that, even though the stock was not transferred to it on such date, it became the equitable owner of the stock because, by the instrument of transfer, it was agreed that any dividends which became due and payable on the stock between the time of signing the lease and the time of actual transfer of the stock were to be retained by Ivanhoe. We have found as a fact that the effective date of the 10-year lease signed on September 30, 1945, was October 1, 1945, and not before. At the time of the signing of the lease on September 30, 1945, Meaker was in possession of the premises under a lease which did not expire until midnight on said date. The new lease by its express terms was "for and during a term of ten (10) years from the 30th day of September, 1945, which term will end the 30th day of September, 1955." It is clear, therefore, that such lease commenced on October 1, 1945. See Thornton v. Payne, 5 John. Rep. 73 (1809). If the lease were construed to commence on September 30, 1945, it *189 would be a lease for 10 years and 1 day which is directly contrary to the specific language contained therein that it was for a 10-year term. The record indicates that the parties understood that October 1st was the date of commencement of the new lease. Meaker paid rent as of the 1st of the month for a term ending at midnight of the last day of the month. Ivanhoe's notice of eviction to Meaker stated that Meaker's goods would be "in the middle of Seymour Street on October 1st." The same understanding is reflected in Ivanhoe's treatment of the lease transaction in its Federal income tax returns. No income was reflected from the lease in its return for the fiscal year 1945, but one-tenth of the total alleged value of the stock received was included in its fiscal 1946 return. Cf. Meeks v. Ring (Sup. Ct. 1889), 4 N. Y. S. 117. In addition to the above, the actual transfer of the Ivanhoe stock was not made by Meaker to Ivanhoe until December 3, 1945; and the indemnity bond required to be furnished by Ivanhoe under the lease was not paid for by Ivanhoe until November 7, 1945, and was not *1360 issued until November 23, 1945. The furnishing of*190 the indemnity bond was one of the material requirements of the lease transaction and the actual transfer of title to the stock on the books of Ivanhoe is to be given considerable significance in determining the correct taxable year in which income is derived. Commissioner v. Segall (C. A. 6, 1940), 114 F. 2d 706, certiorari denied, 313 U.S. 562 (1941). Commissioner v. Lyon, supra, cited by Ivanhoe is not in point. The lease in the instant case was not signed "entirely without restriction" since two specific requirements of the lease were met subsequent to October 1, 1945, viz., that title to the Ivanhoe stock be transferred on the books of Ivanhoe and that an indemnity bond be furnished by Ivanhoe. It therefore follows that the fair market value of the stock ($ 62,718) was taxable income to Ivanhoe in its fiscal year ending September 30, 1946. Commissioner v. Segall, supra. Decision will be entered under Rule 50. Footnotes 1. This figure was arrived at by the parties to the lease on the basis of a payment by Empire of $ 2,025 per quarter ($ 81,000 - $ 2,025 = $ 78,975).↩