Phillips v. Commissioner

T. W. PHILLIPS, JR., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Phillips v. Commissioner Docket Nos. 35469, 41580. United States Board of Tax Appeals 23 B.T.A. 1272; 1931 BTA LEXIS 1742; July 28, 1931, Promulgated *1742 Section 204(a)(8) of the Revenue Act of 1926 is not unconstitutional. J. M. Cumming, C.P.A., for the petitioner. Eugene Harpole, Esq., for the respondent. VAN FOSSAN *1272 These proceedings were brought to redetermine the deficiencies in the income tax of the petitioner for the years 1925, 1926 and 1927. In Docket No. 35469 the respondent asserted a deficiency of $8,822.04 for the year 1925 and in Docket No. 41580 he asserted deficiencies of $5,573.11 and $24,021.95 for the years 1926 and 1927, respectively. The proceedings were consolidated for hearing and report. The sole issue is the constitutionality of section 204(a)(8) of the Revenue Act of 1926. FINDINGS OF FACT. The facts were stipulated. The pertinent portions thereof are as follows: The petitioner is a corporation, organized February 9, 1925, under the laws of the State of Delaware, and has an office and place of business at North Main Street, Butler, Pa. On or about February 9, 1925, the petitioner acquired from T. W. Phillips, Jr., of Butler, Pa., in consideration of the issue to him of its capital stock of a par value of $1,015,448.75, certain securities whose*1743 market value at February 9, 1925, was as follows: 200 shares American Sugar Refining Co $12,900.00 1,500 shares Atchison, Topeka & Santa Fe Ry 176,250.00 400 shares Baltimore & Ohio Railroad Co 32,150.00 1,000 shares Chesapeake & Ohio Railway Co 94,625.00 100 shares Delaware & Hudson Co 14,550.00 50 shares General Electric Co 11,900.00 200 shares Great Northern Railway Co 14,000.00 300 shares Illinois Central Railroad Co 34,537.50 1,200 shares New York Central & Hudson R.R. Co 147,750.00 300 shares Nevada Consolidated Copper Co 4,612.50 100 shares Northern Pacific Railway Co $7,025.00 210 shares Oklahoma Natural Gas Corporation 6,431.25 1,960 shares Pacific Gas & Electric Co 89,200.00 100 shares Philadelphia Co 5,550.00 10,500 shares Shell Union Oil Co 4,200.00 1,200 shares Union Pacific Railroad Co 180,300.00 1,000 shares United States Steel Corporation 126,500.00 440 shares Westinghouse Electric & Mfg. Co 31,680.00 $19,500 Nevada Consolidated 5% debentures 21,287.50 Total 1,015,448.75 *1273 Immediately after the aforesaid transfer of securities to the petitioner in exchange for its capital stock, the transferor, T. W. *1744 Phillips, Jr., owned all of petitioner's capital stock. No gain or loss was recognized in the transaction whereby the said securities were transferred to the petitioner and no taxable profit or income therefrom was reported by the said transferor. During the years 1925, 1926 and 1927 all of the aforesaid securities were sold by the petitioner, the amount received from the sale during each of the three taxable years in question being as follows: [1925] $310,525.50 [1926] 268,412.79 [1927] 635,073.90 Total 1,214,012.19 In the preparation of its income-tax returns for the taxable years 1925, 1926 and 1927 the petitioner reported profits of $28,350.50, $11,481.54 and $158,731.40, respectively, or a total of $198,563.44, the said amount of profit being computed upon the difference between the selling price and the cost of $1,015,448.75 to the petitioner. All of the securities involved herein were purchased by the transferor subsequent to March 1, 1913, and prior to February 9, 1925. The cost to the transferor of the said securities, as to those sold during the respective taxable years, was as follows: [1927] American Sugar Refining Co $10,505.00 Chesapeake & Ohio Ry. Co 56,765.00 Pacific Gas & Electric Co 20,405.06 $4,715.00 $17,995.00 Philadelphia Co 3,415.00 United States Steel Corporation 84,805.00 Delaware & Hudson Co 9,165.00 General Electric Co 6,560.00 Nevada Consolidated Copper Co 3,030.00 Nevada Consolidated 5% debentures 15,972.50 Oklahoma Natural Gas Co 4,231.50 Union Pacific Railroad Co 138,202.50 Westinghouse Electric & Mfg. Co 5,491.00 12,695.00 Atchison, Topeka & Santa Fe. Ry. Co 123,010.00 Baltimore & Ohio Railroad Co 14,022.50 Great Northern Railway Co 14,937.50 Illinois Central Railroad Co 25,982.50 Northern Pacific Railway Co 8,737.50 New York Central Railroad Co 83,652.50 Shell Union Oil Co 1,946.66 Total 175,895.06 187,367.50 302,979.16 *1745 *1274 In the respondent's determination of the petitioner's tax liability contained in the deficiency letters aforesaid, the amount of profit reported by the petitioner was increased as follows: Profit reported increased Year From - To - [1925] $28,350.50 $134,630.44 [1926] 11,481.54 81,045.29 [1927] 158,731.40 332,094.74 The basis used by the Commissioner in computing the amount of profit on these transactions, as shown by the deficiency letters, represents the cost of the said securities to the transferor, T. W. Phillips, Jr. The decrease by the respondent in the basis and the resulting increase in the taxable income is explained by the Commissioner in the following statement in the deficiency letter dated January 23, 1928: A profit on the sale of securities is increased as follows by using the cost to Mr. Phillips instead of the value at date of exchange. OPINION. VAN FOSSAN: Section 204(a)(8) of the Revenue Act of 1926 provides as follows: (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 - * * * *1746 (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *. Section 203 is, in part, as follows: (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 *1275 in such corporation, and immediately after the exchange such person*1747 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. The question of the constitutionality of section 204(a)(8) of the Revenue Act of 1924, the language of which is identical with that of the same section of the 1926 Revenue Act, was considered in ; certiorari denied, ; while in Newman, saunders & ; certiorari denied, , the Court of Claims had before it the same question under both the 1924 and 1926 Acts. In both cases the section was held to be not unconstitutional. See also . Judgment will be entered for the respondent.