Applegate v. Commissioner

RALPH ANDREW APPLEGATE, EXECUTOR, ESTATE OF LELIA V. HOLMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Applegate v. Commissioner Docket No. 7970. United States Board of Tax Appeals 10 B.T.A. 705; 1928 BTA LEXIS 4052; February 13, 1928, Promulgated *4052 1. The March 1, 1913, value of certain shares of stock determined. 2. A certain transaction involved herein, consummated in 1920, held to be a nontaxable exchange of property under section 202 (c)(1) of the Revenue Act of 1921. 3. The decedent subsequent to March 4, 1923, exchanged shares of stock which she held for investment for other shares of stock. Held, that she realized taxable gain even though she and the other party to the exchange had prior to March 4, 1923, agreed to make such exchange. Bernard Potter, Esq., and Lynden Bowring, Esq., for the petitioner. L. Dana Latham, Esq., for the respondent. MARQUETTE *705 This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $11,866.22 for the year 1922 and $8,780.77 for the year 1923. The petitioner alleges that the respondent erred in determining the March 1, 1913, value of certain shares of stock disposed of by the decedent in 1922, and in holding that certain transactions made by the decedent in 1922 and 1923 were sales of stock and not nontaxable exchanges. FINDINGS OF FACT. The petitioner is the*4053 duly appointed, qualified and acting executor of the estate of Lelia V. Holmes, deceased. Prior to March 1, 1913, Lelia V. Holmes acquired 815 shares of the capital stock of the American Brass Co. which she held until the American Brass Co. was reorganized or merged with the Anaconda Copper Mining Co. in 1922. In the reorganization or merger Lelia V. Holmes surrendered her stock in the American Brass Co. and *706 received $150 for each share thereof and 2,460 shares of the capital stock of the Anaconda Copper Mining Co. This stock was held for investment. The fair market value of the stock of the American Brass Co. on March 1, 1913, was $140 per share. About September, 1922, Lelia V. Holmes desired to convert some of the shares of the Anaconda Copper Mining Co. stock which she had acquired in connection with the reorganization of the American Brass Co. into other stock or securities, and she consulted Banks-Huntley, investment brokers of Los Angeles, in regard to the matter. They advised her that she could exchange her Anaconda Copper Mining Co. stock for stock in other companies, and that on such an exchange no gain or loss would be recognized under the Federal income-tax*4054 laws. She was also advised that Banks-Huntley had some shares of stock of the Eastman Kodak Co. which they would exchange for shares of the Anaconda Copper Mining Co. on the basis of a value of $85 per share for the Eastman Kodak Co. stock and a value of $53 per share for the Anaconda Copper Mining Co. stock. She agreed to exchange some of her Anaconda Copper Mining Co. stock on that basis. Pursuant to the agreement thus made, Banks-Huntley delivered to Lelia V. Holmes 400 shares of Eastman Kodak Co. stock. On the basis of $53 per share for the Anaconda Copper Mining Co. stock the 645 shares delivered by Lelia V. Holmes to Banks-Huntley were of the value of $34,185, and on the basis of $85 per share for the stock of Eastman Kodak Co. the 400 shares delivered by Banks-Huntley to Leia V. Holmes were of the value of $34,000. From the total value of the Anaconda Copper Mining Co. stock that Lelia V. Holmes delivered to Banks-Huntley, they deducted a commission of $145.13 and taxes and insurance amounting to $18.92, and paid to Lelia V. Holmes by check $20.95 as "Adjustment on Exchange." In the year 1923 and subsequent to the fourth day of March, Lelia V. Holmes delivered to Banks-Huntley*4055 700 shares of the capital stock of the Anaconda Copper Mining Co. which she had received in connection with the reorganization of the American Brass Co. in 1922, and received in exchange therefor 350 shares of the capital stock of the Associated Telephone Co. of Long Beach, the value of which at that time was $100 per share. Lelia V. Holmes in making her returns of income for the years 1922 and 1923 computed the profit from the disposition of her American Brass Co. stock on the basis of a March 1, 1913, value of $140 per share for that stock, and she treated the two other transactions herein set forth as nontaxable exchanges of stock. The respondent upon audit of the returns determined that the stock of the American Brass Co. had a fair market value of $138 per share on *707 March 1, 1913, and that the two other transactions between Lelia V. Holmes and Banks-Huntley resulted in taxable gain to her. OPINION. MARQUETTE: It is the contention of the petitioner that the stock of the American Brass Co. which Lelia V. Holmes disposed of in 1922 in connection with the reorganization of that company had a fair market value of from $142 to $145 per share on March 1, 1913, which*4056 should be used as a basis for computing Lelia V. Holmes profit from that transaction, and that the two transactions between Lelia V. Holmes and Banks-Huntley in 1922 and 1923, respectively, were nontaxable exchanges of stock under section 202(c)(1) of the Revenue Act of 1921. The respondent contends that the fair market value of the American Brass Co. stock on March 1, 1913, was $138 per share and that as a result of the two transactions between Lelia V. Holmes and Banks-Huntley she realized taxable gain. If these two transactions are not nontaxable under section 202(c)(1) of the Revenue Act of 1921, there appears to be no dispute between the parties as to the profit received by Lelia V. Holmes therefrom. Relative to the first question raised by the record, the only evidence of any probative force that was presented to us was that on March 1, 1913, on the New York Stock Exchange, $138 per share was bid and $142 per share was asked for American Brass Co. stock, but it does not appear that any shares were actually sold. Under the circumstances we are of the opinion that the respondent is not warranted in taking the lower of the two figures as the fair market value of the stock*4057 nor the petitioner in insisting that the higher figure should be adopted. We think that the average of the two prices, namely $140 per share, more nearly represents and should be taken as the fair market value of the stock on March 1, 1913, and we so hold. The next question presented is whether the transaction by which Lelia V. Holmes acquired 400 shares of Eastman Kodak Co. stock and parted with 645 shares of Anaconda Copper Mining Co. stock was a sale by her of Anaconda Copper Mining Co. stock and a purchase of Eastman Kodak Co. or a nontaxable exchange of property under section 202(c)(1) of the Revenue Act of 1921 which provides that: (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 - (1) When any such property held for investment, * * * is exchanged for property of a like kind or use. The evidence relative to this transaction discloses that all that Lelia V. Holmes was attempting to do was to exchange part of her *708 Anaconda Copper Mining Co. stock for other stocks and thus diversify her investments. She gave no order to Banks-Huntley to sell Anaconda*4058 Copper Mining Co. stock or to purchase Eastman Kodak Co. stock for her or on her behalf. She simply agreed with Banks-Huntley that she would exchange Anaconda Copper Mining Co. stock for stock of the Eastman Kodak Co. on the basis of the value of $53 per share for the former and $85 per share for the latter stock. She paid no money for the Eastman Kodak Co. stock and she received no money for the Anaconda Copper Mining Co. stock. The check for $20.95 which was given her was a balance which could not be absorbed by an exchange of stock unless the parties dealt in a fraction of a share which evidently they did not desire to do. We attach no importance to the fact that Banks-Huntley charged and collected a commission nor to the manner in which they handled the transaction on their books. The record is clear that as far as Lelia V. Holmes is concerned she intended to and did exchange Anaconda Copper Mining Co. stock for Eastman Kodak Co. stock. In , we had occasion to pass on the question whether a certain transaction very similar to the one we are now considering constituted a nontaxable exchange of property*4059 under section 202(c)(1) of the Revenue Act of 1921. In holding that it did we said: However, the uncontroverted evidence of what was actually done shows the essential elements of an exchange. The difference between a sale and an exchange is that in the former property is transferred in consideration of an agreed price expressed in terms of money, while in an exchange property is transferred in return for other property without the intervention of money. 23 C.J., p. 185. Here petitioner owned shares of stock of one corporation; Estabrook & Co. owned shares of another. She transferred her stock to Estabrook & Co. and the latter transferred to her in return stock which they owned of the other corporation, and each thereafter owned and held the stock thus acquired. There was no intermediary or any intermediate transfer. Upon consideration of the transaction in question we are of the opinion that it was not a sale of stock by Lelia V. Holmes, but that it was an exchange of stock which under section 202(c)(1) of the Revenue Act of 1921 did not give rise to either gain or loss. With reference to the transaction by which Lelia V. Holmes transferred to Banks-Huntley 700 shares*4060 of Anaconda Copper Mining Co. stock and received 350 shares of Associated Telephone Co. stock, it is our opinion that it was an exchange of securities, but that Lelia V. Holmes received taxable gain. Under section 202(c)(1) of the Revenue Act of 1921 as first enacted this exchange would not have been subject to income tax, but by the amendment of March 4, 1923, exchanges of stocks and bonds were expressly excluded from the exemption from taxation which had obtained under section 202(c)(1) *709 as originally enacted. This amendment was by its terms effective as of January 1, 1923; the exchange of stocks did not take place until after March 4, 1923. Whether it was within the power of Congress to make the amendment retroactive so as to affect transactions occurring before the date of its passage is not before us, since the transaction which we are considering occurred after the amendment was passed. There is some evidence that the parties had orally agreed to make the exchange "along the latter part of February or first of March," but that is not material here; the statute refers to an exchange of property, not an agreement to make an exchange at some future time. We think*4061 that under section 202(c)(1) of the Revenue Act of 1921 as amended by the Act of March 4, 1923, the exchange in question is not a nontaxable exchange of property and we so hold. Judgment will be entered on 20 days' notice, under Rule 50.