New Jersey Porcelain Co. v. Commissioner

NEW JERSEY PORCELAIN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. New Jersey Porcelain Co. v. Commissioner Docket No. 29568. United States Board of Tax Appeals 15 B.T.A. 1059; 1929 BTA LEXIS 2737; March 25, 1929, Promulgated *2737 Where a corporation sells capital assets and as a part of the consideration therefor receives certain of its own shares of stock, held, that the transaction is one that may result in gain or loss and such gain or loss must be ascertained by determining the fair market value of the property other than cash included in the sales price. Frederick Schwertner, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. LANSDON *1059 The respondent asserted a deficiency in income tax for the year 1923 in the amount of $2,761.05. The only issue involved is whether in the taxable year the petitioner sustained a loss in the amount of $22,088.35 on the sale of certain capital assets. *1060 FINDINGS OF FACT. Petitioner is a New Jersey corporation, organized January 21, 1920, with its principal office and place of business at Trenton, where it is engaged in the manufacture of porcelain specialties. At the date of incorporation, and in the taxable year, its authorized capital stock was $125,000, consisting of 1,000 shares of common and 250 shares of preferred stock, each of the par value of $100. Early in January, 1920, and*2738 prior to the incorporation of the petitioner, Stephen Wenczel acquired property consisting of land and buildings situated in Trenton, and paid therefor the amount of $14,000. At or about the date of incorporation petitioner acquired from Wenczel the property theretofore purchased by him and which is hereinafter designated as the old plant, and paid therefor by the issue of shares of its stock of the par value of $14,000. Thereafter it constructed additional buildings and kilns and acquired additional machinery, furniture and fixtures. At November 24, 1923, the books of the petitioner show that the depreciated cost of the buildings, kilns, machinery, furniture and fixtures of the old plant was $47,088.35. The old plant having become unsuitable for the purposes of the petitioner in the year 1923, it constructed, equipped, and moved into a new plant and discontinued all further use of the old plant in the operation of its business. The abandoned property was at once offered for sale to various prospective purchasers at prices ranging from $65,000 down to $35,000, but no buyer was found. On November 24, 1923, the president of the petitioner offered to purchase it for $25,000. Certain*2739 of the stockholders objected to such a sale and thereafter a group of the objectors proposed to purchase the old plant for $25,000, and this proposition was accepted. On December 1, 1923, the board of directors of the petitioner adopted the following resolution: Resolved that the old plant be sold to Anthony Babecki, Jos Dydzulis, Anthony Mieszkowski, and Wladyslaw Mieszkowski for the sum of twenty-five thousand dollars payable partly in shares of common and preferred stock now held by them and cash up to fifteen thousand dollars ($15,000.00) and ten thousand dollars first mortgage 6% interest bearing bond. The deposit of five hundred dollars ($500.00) to be accepted now and the sale be ratified within ensuing three days the company's president and secretary being authorized to execute necessary documents for this sale and transfer of property in presence of company's consular Erwin E. Marshall. On December 1, 1923, the petitioner executed to the proposed purchasers the following receipt: RECEIVED from Anthony Babecki, Anthony Mieszkowski, Wladyslaw Mieszkowski and Joseph Dudzulis and of Trenton, N.J., sum of FIVE HUNDRED DOLLARS ($500.00) as a deposit on purchase of plant*2740 situated at Pennsylvania Ave. near Mulberry Street in the city of Trenton, State of New Jersey, per agreement *1061 of stockholders of New Jersey Porcelain Co., at a special meeting held today. The purchase price agreed is $25,000.00, Twenty-five thousand dollars, payable in the following manner $500.00 on receipt and delivery of this document, $13,660.00 in common and preferred stock of New Jersey Porcelain Co., Inc., now held, and $840.00 cash on delivery of sale agreement made, and first mortgage bond for $10,000.00 made out in our name on delivery of Warranty Deeds and Searches. NEW JERSEY PORCELAIN CO., INC. On December 11, 1923, the petitioner executed a deed to the land upon which the old plant was erected. All the terms and conditions of the resolution authorizing sale and of the receipt herein set forth were duly accomplished and on December 11, 1923, the old plant was delivered to the purchasers. The capital shares of its own stock received by the petitioner as a part of the consideration were taken into its accounts as treasury stock. Beginning at April 12, 1920, and continuing to November 29, 1922, the petitioner sold approximately 178 shares of its preferred*2741 stock and 479 shares of its common stock at par, to various purchasers. On December 29, 1923, an officer of the company bought 5 shares of the petitioner's common stock and 1 share of its preferred stock at par. From the date of its incorporation to December 29, 1923, the fair market value of the petition's common and preferred stock at all times was $100 per share. At about the time of the sale of the old plant the book value of the common stock of the petitioner, as indicated by its balance sheets, was $219 per share. In its income-tax return for the year 1923 the petitioner deducted the amount of $22,088.35 from its gross income as a loss sustained in such year from the sale of capital assets. Upon audit the Commissioner disallowed such deduction and as reason therefor stated: The transaction involving the sale of the old plant for shares of your capital stock is held to be a capital transaction within the meaning of article 543, Regulations 62, whereby no gain or loss can be recognized for income tax purposes. OPINION. LANSDON: The parties agree that in the taxable year the petitioner sold its old plant to a group of its stockholders and received therefor cash in*2742 the amount of $1,340, all of the shares of its common and preferred stock owned by such group, of the par value of $13,660, and took a mortgage for the balance of the purchase price of $25,000, in the amount of $10,000. The books of petitioner reflect a depreciated cost of the assets alleged to have been sold, in the amount of $47,088.35. On these facts the petitioner contends that it sustained a loss in the amount of $22,088.35 and claims the right to deduct such loss from its gross income in the taxable year, under the provisions of section 234(a)(4) of the Revenue Act of 1921. This contention must be sustained if the proof establishes the cost of *1062 the assets, since there is no controversy over the sales price unless the respondent's contentions that the inclusion of certain shares of the petitioner's stock in such price makes the sale a capital transaction and that when received the shares of common stock had a book value much in excess of par require a different conclusion. In his brief counsel for respondent argues that the record fails to prove either the value of the property acquired for stock at date of incorporation, or the fair market price of the stock*2743 at such date. We can not sustain this contention. The evidence is clear that Wenczel paid $14,000 for the original property and that within a few days thereafter he transferred it to the petitioner for a consideration of 140 shares of the petitioner's stock which were issued to him and his associates. The proof of the fair value of the property originally acquired is satisfactory. Counsel also contends that the evidence of the depreciated cost of the property sold as the old plant is inadequate. Petitioner introduced the ledger entries purporting to show such cost. Its secretary testified that he had personally checked such entries against the books of original entry. All the books of the petitioner were produced at the taking of the depositions and were available for inspection and checking by the representatives of the respondent. There is no controversy over either the rates or amounts of the depreciation which the Government has allowed as deductions from operating income on the basis of the original cost here claimed. In these circumstances we are satisfied with the proof that the depreciated cost of the assets sold as the old plant was $47,088.35. *2744 The Commissioner disallowed the loss in controversy on the theory that the inclusion of certain shares of the petitioner's outstanding capital stock in the consideration received from the purchasers converted the entire procedure of sale and purchase into a capital transaction from which neither gain nor loss could result. We think this contention is conclusively dealt with adversely to the theory of the respondent in . The facts in that appeal are quite similar to those proved in the instant proceeding. The respondent there relied on our decisions in ; ; ; and . In the Behlow decision we said: The cases relied upon are not authority for the position taken. This is not a case of a gain or loss realized or sustained by a corporation in the purchase of its own capital stock or gain or loss resulting from the purchase by or within an affiliated group of corporations. *2745 Petitioner seeks to take a loss represented by the difference between the cost of the stocks and bonds in question and the sale price thereof. The stock of petitioner is not in question nor a gain or loss resulting from the purchase thereof. In the , the petitioner had purchased its *1063 own capital stock and endeavored to take a loss on the subsequent sale of the same. We held that to be a capital transaction that did not result in a realized loss. Here the petitioner is not seeking such a loss but rather one that resulted from the sale to Behlow of stocks and bonds of other corporations for less than cost. The fact that the stocks and bonds were to be applied to the extent of their then value in payment of the purchase price of its own stock does not make the same a capital transaction from which neither gain nor loss may result. Cf. Callanan Road Improvement Co., B.T.A. 1109. In the case of , the controversy hinged on facts almost identical to those herein, with the position of the parties reversed. There the taxpayers sought*2746 to escape payment on the gain resulting from the sale of capital assets in which a part of the consideration was shares of its own capital stock. The Government opposed this contention. The court held for the Government. The substance of that decision is thus stated in the syllabus: Where facts showed that corporation, on a sale or other disposition of the property, made a gain, the taxability of such gain was not to be avoided on the theory that its property became merged with the property of another corporation, and it was immaterial that part of the consideration was in corporate stock of the vendee, and that under state law no right existed to stipulate for part of the consideration in corporate stock. In conformity with our own decision in the Behlow proceeding, supra, and with the opinion of the court in , we conclude that the transaction here involved is not to be regarded as the purchase by the petitioner of its own stock or the liquidation of such stock, but as a sale of capital assets. This being true, the purchase price must be ascertained by including therein the fair market value of the property*2747 other than cash and mortgages which was received. As we have found that the fair market price of petitioner's stock at date of sale was $100 per share, it follows that the alleged loss has been proved unless other facts of record yet to be considered bar this conclusion. In his cross-examination of witnesses called by the petitioner, the respondent elicited the information that the books of the petitioner indicated a book value of its common stock at date of sale of at least $219 per share. The petitioner does not dispute the book value and even admits that its balance sheets as of December 31, 1923, indicate a book value of at least $240, but contends that as it has proved a market value of $100 per share the book value has no bearing on the issue here. As we have held above that the sale was not a capital transaction but a sale of capital assets, it follows that the loss must be determined by ascertaining the fair market value of the property, other than cash and mortgages included in the sales price. Decision will be entered for the petitioner.