Holmby Corp. v. Commissioner

HOLMBY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Holmby Corp. v. Commissioner Docket No. 51303. United States Board of Tax Appeals 28 B.T.A. 1092; 1933 BTA LEXIS 1051; August 15, 1933, Promulgated *1051 1. DIVIDENDS - ORDINARY OR LIQUIDATING DIVIDENDS. - Where petitioner, a holding corporation, owned practically all the stock of another corporation, and such other corporation granted an option for the sale of its department store business, assets (with certain exceptions), good will and corporate name, which option was exercised on October 29, 1926, and thereafter on November 10, 1926, the corporation declared a distribution of $50 per share, and on November 17, 1926, declared another distribution of all surplus profits on hand on November 19, 1926, and was disincorporated on or about December 24, 1926, when all the remaining assets were distributed in liquidation, held, that said distributions of November 10 and November 19, 1926, were "amounts distributed in partial liquidation" of a corporation as that term is used in section 201(c) and defined in section 201(h) of the Revenue Act of 1926, rather than ordinary dividends as the term "dividend" is defined in section 201(a) of the same act. Held, further, that the entire distributions were steps in a plan of complete liquidation of the selling corporation's stock and petitioner is taxable on the profits resulting therefrom. *1052 2. COST OF STOCK ACQUIRED FOR STOCK OF HOLDING CORPORATION. - Petitioner, a holding corporation, issued all of its capital stock to an individual who was the owner of shares in several other corporations, in consideration for the transfer to it of the shares owned by the individual in such other corporations. Held, the basis of the cost of these latter shares is not the cost to the transferor, because of the parenthetical clauses in section 204(a)(7)(8) of the Revenue Act of 1926. The cost of the shares so acquired is the fair market value of the stock of the holding corporation so issued. Stires Corp.,28 B.T.A. 1, followed. A. Calder Mackay, Esq., and Thomas R. Dempsey, Esq., for the petitioner. Alva C. Baird, Esq., for the respondent. BLACK *1093 Petitioner seeks the redetermination of a deficiency in income tax for the calendar year 1926 in the amount of $414,959.63. Approximately $559,000 is in controversy, due to petitioner's prayer that the Board find an overpayment rather than a deficiency. The issues will be stated in the opinion. FINDINGS OF FACT. Petitioner is a holding corporation, organized*1053 under the laws of California, with its principal office in the city of Los Angeles (the date of its organization and the assets acquired in exchange for its stock will be set forth later in chronological order). During the period from 1900 to 1919 and for some time prior thereto, Arthur Letts (now deceased) owned individually a department store in the city of Los Angeles, California, known as "The Broadway Department Store." During the year 1919 the individual business theretofore conducted by Letts was incorporated under the laws of the State of *1094 California as "The Broadway Department Store", sometimes hereinafter referred to as the old company, with authorized capital stock of 50,000 shares of the par value of $100 each, of which 49,996 shares were issued to Letts for the net assets of The Broadway Department Store (Arthur Letts' individually owned business), and four shares were issued for cash. On May 16, 1921, Letts caused to be organized as a corporation the petitioner herein, with an authorized capital stock of $8,000,000 divided into 80,000 shares of the par value of $100 per share. On or about August 1, 1922, the petitioner acquired 30,000 shares of*1054 the capital stock of The Broadway Department Store from Letts and certain other shares of stock in other corporations held by Letts, and issued to Letts in payment or exchange therefor 79,788 shares of its capital stock. The transaction was set up on the books of petitioner in the following amounts and valuations: Value per Total share 30,000 shares Broadway Department Store $135.00 $4,050,000 160,000 shares Bullocks 27.20 4,352,000 75 shares Pacific Mutual Life Insurance Co 510.00 38,250 86 shares Cooper, Coate & Casey 150.00 12,900 25 shares Morris Plan Co 100.00 2,500 500 shares California Delta Farms, Inc 29.50 14,750 1,000 shares Central Investment Corporation 100.00 100,000 100 shares Yosemite National Park Co 100.00 10,000 Total 8,580,400 Indebtedness of Arthur Letts assumed: Broadway Department Store $386,600.00 Bullocks 215,000.00 601,600 Exchanged for Holmby Corporation capital 7,978,800 stock (79,788 shares) On May 18, 1923, Letts died. The distribution of his stockholdings in petitioner was not made by his estate to the heirs entitled thereto until the year 1925. On August 10, 1926, the board*1055 of directors of petitioner met and adopted a resolution authorizing the officers of petitioner to execute, acknowledge, and deliver to Dillon, Read & Co., a joint stock association of the State of New York, petitioner's written consent to a proposed option and sale referred to in the preamble to the resolution in part as follows: WHEREAS, The Broadway Department Store, a corporation, and Dillon, Read & Co., * * * are about to enter into an agreement whereby Dillon Read & Co. are to have the option to purchase all of the assets of The Broadway Department Store, excepting certain items * * * at the price of $7,000,000.00 at any time on or before November 1st, 1926, * * *; Dillon, Read & Co. desire that said proposed option and the sale therein provided for be consented to by the owners and holders of not less than two-thirds, of the issued and outstanding capital stock of The Broadway Department Store, a corporation. *1095 On August 12, 1926, the board of directors of the old company held a special meeting and adopted a resolution authorizing and directing its officers to execute and deliver to Dillon, Read & Co. a written option for the sale of all its assets "excepting*1056 certain items particularly described in paragraph '2' of the written option hereinafter referred to" at a price of $7,000,000, at any time on or before November 1, 1926, and upon the exercise of the option to execute, acknowledge, and deliver to the one entitled thereto under the provisions of the option by conveyances and other instruments of transfer and to do any and every other thing necessary to carry out the sale provided for in the option. On August 12, 1926, a memorandum of agreement (the written option referred to heretofore) was signed by the old company, party of the first part, and Dillon, Read & Co., parties of second part. Among its preliminary recitations the agreement recited as follows: WHEREAS, the Bankers have been requested by the Company, and the Company does hereby request the Bankers, to devise a plan for the sale by the Company of the assets and good will of the department store business now operated by the Company * * *, and the Bankers have expended both time and money upon a preliminary examination of the capitalization, earnings and financial condition of the Company and are now engaged in further expenditures of time and money therein; Now, THEREFORE, *1057 in consideration of the past and present expenditures of time and money by the Bankers pursuant to the request above stated and of the sum of One Dollar ($1.00) by the Bankers paid to the Company, receipt whereof is hereby acknowledged, and of other good and valuable considerations, the Company hereby gives and grants unto the Bankers an option to purchase the business, property and assets of the Company, including its good will and the right to the exclusive use of the name "The Broadway Department Store" in connection with the operation of a department store business; * * * (Subject, however, to the provisions hereinafter set forth in paragraph "2" hereof) and subject to its liabilities which the assignee taking title to assets must assume, on the following terms and conditions: 1. The price to be paid for such assets is the sum of Seven Million Dollars ($7,000,000.00) in cash, payable to the Company or on its order, as hereinafter in paragraph "6" provided, against the delivery to the Bankers or their nominee or nominees of such conveyances and other instruments of transfer as may be approved of by counsel for the Bankers. Paragraph 2 of the agreement expressly reserved from*1058 the proposed sale assets at an agreed valuation of $1,395,736.97, "plus a sum sufficient to pay estimated federal income taxes on profits accruing from the operation of the department store business between June 30, 1926, and date of transfer of assets" and with certain limitations not here material, "an amount in cash not exceeding interest at the rate of six per cent (6%) per annum on $7,000,000.00 from July 1, 1926, to the date of transfer of said assets * * *." *1096 Paragraph 2 further provided that the company would assume a certain liability of $25,000; that in any event the "net current assets" to be transferred should not be less than $4,225,000; that "it is understood that if this option is not exercised and said sale consummated on or before October 1, 1926, the company, according to its regular custom, may declare and pay to its stockholders its regular quarter-yearly dividend of $1.50 per share"; and that "the company covenants that prior to any transfer made hereunder or determination hereof * * * it will not make any further capital distribution by way of dividends, increased salaries or otherwise, nor pay any further dividends on its capital stock." The remaining*1059 paragraphs of the agreement of August 12, 1926, provided among other things that he bankers should have the right to form a new corporation; that the "Bankers may exercise this option at any time on or before November 1, 1926"; that "in consideration of the premises the company will out of the assets to be retained hereunder, reimburse the Bankers for" certain expenses not exceeding $20,000; and that "in case said option shall not be exercised by the Bankers * * * the same shall automatically lapse and terminate * * *." On October 15, 1926, the board of directors of the old company held a special meeting and adopted a resolution authorizing and directing its officers to execute and deliver to Dillon, Read & Co. a written agreement amending the provisions of the option agreement of August 12, 1926, "in some minor particulars" which agreement was executed and delivered on the same day. The part of the agreement which is material here provides as follows: If this option is exercised and the actual accounting, settlement and transfer of assets cannot be made until a date subsequent to October 31, 1926, after October 31, 1926, and until the actual transfer of assets has been completed, *1060 the Company shall continue to operate the business and property herein agreed to be sold for the account of the Bankers or the new corporation, in its usual and customary manner, and in the accounting and settlement between the Company and the Bankers the Company shall be entitled to receive interest on the purchase price of Seven Million Dollars ($7,000,000.00) from and including November 1, 1926, until the date of payment at the rate of six per cent (6%) per annum, and the Company shall also be entitled to all income accruing on and after November 1, 1926, on all items of assets of the Company which are reserved from sale hereunder, including interest at the rate of six per cent (6%) per annum from November 1, 1926, on such cash amount as the Company shall be entitled to retain out of the current assets of the Company, in accordance with the provisions of this agreement. On October 26, 1926, a new company, the "Broadway Department Store, Inc.", sometimes hereinafter referred to as the new company, was created under the laws of the State of Delaware. *1097 On October 29, 1926, the board of directors of the new company held a meeting and authorized the purchase of the*1061 assets of the old company as provided for in the option agreements of August 12, 1926, and October 15, 1926. On October 29, 1926, the old company addressed two letters to Dillon, Read & Co., one being supplementary to the option agreement of August 12, 1926, as amended by the agreement of October 15, 1926, and not material here, and the other one providing in part as follows: In consideration of your accepting the letter from Broadway Department Store, Inc. to you dated October 29, 1926, for the transfer of properties to said corporation and the issue of its securities, we hereby agree that, out of the moneys payable to us under the option agreement between us dated August 12, 1926, as modified by agreement dated October 15, 1926, and supplemented by letter to you from us, dated October 29, 1926, you may retain the sum of $250,000.00 until receipt by you of the final accounting certificates of Price Waterhouse & Co. contemplated by said option agreement as so modified; * * * On October 29, 1926, Dillon, Read & Co. addressed a letter to the old company, the contents of which are as follows: Pursuant to the provisions of paragraph 6 of the agreement between us dated August 12, 1926, as*1062 modified by agreement between us dated October 15, 1926, and supplemented by letter to us from you dated October 29, 1926, we hereby notify you that we desire to and hereby do exercise the option given and granted by said agreement as so modified and supplemented, upon and subject to all the terms and conditions therein stated. On October 31, 1926, the earnings and profits of the old company accumulated since the date of its incorporation in 1919 amounted to $5,524,723.19. The amount of its cash on hand and in the banks on that date was $806,542.41. On November 20, 1926, a "Bill of Sale and Agreement" was delivered, which had been signed by and between the old company as first party, the new company as second party, and Dillon Read & Co. as third party, which document provided, in part: That, in accordance with the provisions of the said option agreement as so amended and modified, and in accordance with the order and instructions of the third party, and in consideration of the payment by the third party to the first party of the sum of Seven Million Dollars ($7,000,000.00), receipt of all of which consideration is acknowledged by the first party, excepting the sum of $250,000.00*1063 retained by the third party to be disposed of in accordance with the letter of October 29, 1926, hereinbefore described, the said The Broadway Department Store, (first party hereto) hereby sells, transfers and assigns to Broadway Department Store, Inc., (the second party hereto) all of the business, property and assets of the first party, including its good will and the right to the exclusive use of the name 'The Broadway Department Store' in connection with the operation of a department store business, * * * except *1098 the assets expressly reserved in the option agreements as modified. It also provided as follows: It is further understood that the sale, transfer and assignment of the property and business evidenced by this Bill of Sale and Agreement, and the Assignments of Leases hereinbefore described, shall take effect as of the end of October 31, 1926, and it is agreed that if the actual physical transfer of said property and business is delayed beyond that time, between the end of October 31, 1926, and the date of the actual physical transfer of said property and business by the first party to the second party, the first party shall continue to operate the said property*1064 and business for the account of the second party in its usual and customary manner * * *. In such accounting and settlement the first party shall be entitled to retain, out of the earnings accruing after October 31, 1926, a sum equal to interest at the rate of 6% per annum on the sum of $7,000,000.00 from and including November 1st, 1926, to actual date of receipt of all of said $7,000,000.00 by the first party excepting the $250,000.00 to be withheld as hereinbefore described. On November 10, 1926, the board of directors of the old company held a "special" meeting and adopted a resolution, the material part of which is as follows: RESOLVED: That a dividend of Fifty Dollars ($50.00) per share on the outstanding capital stock of this Corporation be, and the same hereby is declared to be paid out of the surplus profits, payable on or about November 19th, 1926, to stockholders of record November 18th, 1926, and the Treasurer is hereby authorized to pay said dividend. On November 13, 1926, Dillon, Read & Co. issued to each stockholder of the old company its consent authorizing each such stockholder (except petitioner) to sell his or her stockholdings in the old company to petitioner*1065 herein. Accordingly, on November 17, 1926, petitioner purchased 19,995 shares of the old company at a cost of $161 per share or $3,219,195. As to the cost of these particular shares there is no controversy. On November 17, 1926, the board of directors of the old company held a "special" meeting and adopted a resolution authorizing the sale to petitioner of certain stock, bonds, and real estate (assets which had been excepted from the sale of Dillon, Read & Co.) for a total cash consideration of $265,000 and the assumption of certain liabilities. The resolution further provided as follows: That, WHEREAS, this corporation has certain liabilities and contingent claims which cannot be at this time definitely ascertained or fixed, and WHEREAS, the Board of Directors has set aside certain assets to meet the same when and as the amounts thereof can be determined, and WHEREAS, the Holmby Corporation has indicated that, in consideration of the transfer to it of the assets set aside by this corporation to meet such contingent claims and liabilities, the said Holmby Corporation will assume and agree to pay the said contingent claims and obligations when the same become fixed. *1066 *1099 Now, THEREFORE, BE IT RESOLVED: That the officers of this corporation be, and they are hereby authorized and instructed to accept the offer of said Holmby Corporation and to transfer to it the assets of this corporation so set aside to meet such contingent claims and liabilities upon said Holmby Corporation assuming and agreeing to pay the same. Vice-President McNaghten then announced that it appeared that this corporation, at the close of business on Friday, the 19th day of November, 1926, would have on hand surplus profits from earnings which would be available for dividends. Upon motion of Director McNaghten, seconded by Director Strasburger and duly carried, it was RESOLVED: That a dividend of all surplus profits of this corporation on hand at the close of business on the 19th day of November, 1926, payable on or after November 22, 1926, when and as funds are available, to stockholders of record on November 20, 1926, be and it is hereby declared; and that the officers of this corporation be, and they are hereby instructed and directed to determine and fix the amount of such surplus profits, and to thereafter pay said dividend. On November 19, 1926, petitioner*1067 received, pursuant to the dividend resolution of November 10, 1926, the amount of $2,499,750. On the same date, the old company received from Dillon, Read & Co. the amount of $5,270,100 as payment of part of the purchase price of the assets sold to the new company. A large part of the dividend distribution of $2,499,750 was made out of this latter amount. On November 22, 1926, petitioner received, pursuant to the dividend resolution of November 17, 1926, the amount of $574,025.03. The two dividends aforesaid were not ordinary dividends made by a going corporation in the ordinary course of its business, but were liquidation distributions made by the corporation. On November 22, 1926, the stockholders of the old company held a special meeting and adopted a resolution, the material part of which is as follows: WHEREAS, this corporation has sold and disposed of its business and business interests and has paid off and discharged its obligations and liabilities, and WHEREAS, this corporation does not intend to engage in active business in the future, and is now in a position to liquidate, and to distribute to its stockholders its assets on hand, and intends to so distribute*1068 its assets to its stockholders and effect a complete liquidation. Now, THEREFORE, BE IT RESOLVED: That this Corporation proceed at once to dissolve, and that the officers and directors hereof be, and they are hereby authorized and directed to prepare and file in the Superior Court of the State of California, in and for the County of Los Angeles, an application for the voluntary dissolution of this corporation, and that they take and do such other steps and proceedings as may be necessary to accomplish such dissolution. On or about December 24, 1926, at which time petitioner received a final distribution from the old company in the amount of $5,010,293.09, *1100 the latter company was disincorporated by decree of the superior court of the County of Los Angeles, State of California, and all of its outstanding capital stock was redeemed and canceled. In its corporation income tax return for the calendar year 1926, petitioner reported, as a result of the liquidation of the old company, a profit of $17,700 on the 30,000 shares acquired in 1922 and a loss of $1,208,901.91 on the 19,995 shares acquired on November 17, 1926. Both computations, as reported, are as follows: *1069 (e) Corporation stock acquired August 1, 1922, $17,700.00 at $135,000 per share or a total consideration of $4,050,000.00 for 30,000 shares, was liquidated during 1926 at $100.00 per share resulting in a loss of $1,050,000. However, this transaction also comes within the scope of Section 204(a)(8) of the Revenue Act of 1926 and the cost of this stock in the hands of the transferor is found to be at $99.41 per share or a total of $2,982,300.00. As this corporation received $3,000,000.00 in liquidation, the result is a profit of (f) Stock of The Broadway Department Store $1,208,901.91 purchased November 17, 1926, for a total consideration of $3,219,195.00, which corporation was disin- corporated by order of court December 24, 1926. After date of purchase of said stock and before disincorporation proceedings were started, dividends out of surplus earned since March 1, 1913, were declared and credited of "Dividends Received" on this reporting taxpayers books. In final liquidation under order of court The Broadway Department Store paid on account of the stock purchased November 17, 1926, the sum of $2,010,293.09, resulting in a loss of *1070 The respondent determined that the two distributions declared on November 10, 1926, and November 17, 1926, were, as stated in his deficiency notice, "but steps in a plan of complete liquidation * * * within the meaning of section 201(c) of the Revenue Act of 1926" and that instead of a loss of $1,191,201.91 ($1,208,901.91 minus $17,700) deducted by petitioner on its return, petitioner realized a profit on the liquidation of the old company of $1,882,573.12, computed as follows: Amount received on or about December 24, 1926 $5,010,293.09 Dividend declared Nov. 10, 1926 2,499,750.00 Dividend declared Nov. 17, 1926 574,025.03 Total received in liquidation 8,084,068.12 Deduct cost of stock: 30,000 shares at $99.41, per ret $2,982,300.00 19,995 shares at $161 per share 3,219,195.00 6,201,495.00 Profit on liquidation 1,882,573.12 The cost to petitioner of 30,000 shares of the common capital stock of the old company acquired by it on or about August 1, 1922, was the amount of $135 per share. *1101 OPINION. BLACK. The problem here is to determine the correct amount of either a gain a loss upon the liquidation of the old company, *1071 which was completed on or about December 24, 1926, at which time it was disincorporated and petitioner, a holding corporation, received $5,010,293.09. The problem involves two questions - (1) whether the two distributions authorized on the 10th and 17th of November, 1926, and amounting in the aggregate to $3,073,775.03, were either "amounts distributed in complete liquidation" or "amounts distributed in partial liquidation" as those terms are used in section 201 (c) and as the latter term is defined in section 201(h) of the Revenue Act of 1926, or whether such distributions were ordinary dividends as the term "dividend" is defined in section 201(a) of the same act; and (2) whether the respondent erred in determining the cost to petitioner of the 30,000 shares of The Broadway Department Store purchased by it on or about August 1, 1922. The applicable sections of the Revenue Act of 1926 are set out in the margin. 1 There is no dispute between the parties in regard to the amount of $5,010,293.09 received by petitioner on December 24, 1926, being a distribution in the liquidation of a corporation, and hence within section 201(c), supra; or in regard to the full amount of either*1072 a gain or a loss, whichever it may be, being recognizable under section 203 without the application of any of the several exceptions mentioned therein. As set out in our findings the petitioner*1073 in its return claimed a loss of $1,191,201.91 on the ground that the two dividends declared on November 10, 1926, and November 17, 1926, were ordinary dividends within the meaning of the term "dividend" as defined in section 201(a) of the statute, and that the cost to it of the 30,000 shares of The Broadway Department Store was $99.41 per share, or $2,982,300, because of the applicability to the transaction of section 204(a)(8) of the Revenue Act of 1926, whereas the respondent accepted the petitioner's statement as to the cost of the 30,000 shares *1102 but determined that the two dividends "were but steps in a plan of complete liquidation * * * within the meaning of section 201(c) of the Revenue Act of 1926" and that instead of a loss, petitioner realized a profit of $1,882,573.12. Petitioner contends, as has already been stated, that the two dividends in question were ordinary dividends and within section 201 (a), and now contends that the cost to it of the 30,000 shares of The Broadway Department Store on or about August 1, 1922, was $135 per share, or $4,050,000, instead of the $99.41 used by petitioner in its income tax return. This latter contention is based on the*1074 claim that petitioner erred when it treated the transaction as coming within the provisions of section 204(a)(8), Revenue Act of 1926. Petitioner now contends that because of the parenthetical clause in section 204(a)(8), viz., "(other than stock or securities in a corporation a party to a reorganization)", the transaction did not fall within the scope of section 204(a)(8) and hence the basis for gain or loss of these 30,000 shares of stock in The Broadway Department Store is their cost to petitioner. Petitioner's contention that section 204(a)(8), Revenue Act of 1926, does not apply, and that cost to petitioner of the stock in the old company should be the basis for gain or loss in final liquidation, is sustained. Stires Corp.,28 B.T.A. 1. Petitioner contends that on this basis of cost it sustained a loss on the liquidation of The Broadway Department Store of $2,258,901.91, computed as follows: Cost of 30,000 shares at $135 per share $4,050,000.00 Cost 19,995 shares at $161 per share 3,219,195.00 Total cost of all shares 7,269,195.00 Amount received on or about Dec. 24, 1926 5,010,293.09 Loss on liquidation 2,258,901.91 If petitioner*1075 is correct in both its contentions, it has overpaid its taxes for the year in question in a considerable amount. If petitioner is wrong in its contention as to the dividend issue, but is right as to the issue of the cost basis of the 30,000 shares of stock in the old company, there is a deficiency, but not in as large an amount as has been determined by respondent. We shall first consider question number (1) as stated in the opening paragraph of this opinion. A distribution may come within the broad definition of a "dividend" as defined in section 201(a), supra, and yet at the same time be the very transaction specifically provided for in section 201(c) of the statute. Langstaff v. Lucas, 9 Fed.(2d) 691; affd., 13 Fed.(2d) 1022; Hellmich v. Hellman,276 U.S. 233. *1103 Petitioner in support of its contention that the two distributions in question were ordinary rather than liquidating dividends, relies primarily upon the fact that no resolution of the stockholders to dissolve the corporation had been adopted until November 22, 1926, which date was subsequent to the date of declaration of the two dividends, citing*1076 E. G. Perry,9 B.T.A. 796, and Deposit Trust & Savings Bank, Executor,11 B.T.A. 706. We pause to say that both those decisions were prior to the decision of the Supreme Court in Hellmich v. Hellman, supra, and most of the other Board and court cases hereinafter cited, and we do not think they should be longer followed. We have held that resolutions of stockholders or directors of a corporation to liquidate the corporation as soon as it could be done economically or that "there be and hereby is declared a liquidating dividend" does not necessarily stamp such or subsequent distributions with the name of liquidating dividends, if they are not such in fact. See W. E. Guild,19 B.T.A. 1186; Estate of Rudolph F. Rabe, Sr.,25 B.T.A. 1242. In the latter case we said "In determining the nature of a distribution, the facts of the case control." In the former case we also said: Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal*1077 and necessary result of which is the winding up of the corporate business. In Milton Tootle, Jr.,20 B.T.A. 892, a certain dividend of $25 per share, declared on December 15, 1925, after the corporation had on November 24, 1925, sold all of its assets except cash and a certain refund claim, and had agreed with the purchaser to liquidate within one year, but before any formal resolution to dissolve had been adopted, was held to constitute "the first step in the liquidation" of the corporation. We there distinguished the Perry case as establishing no rule applicable to such a situation. In affirming the Board, the Eighth Circuit, at 58 Fed.(2d) 576, 580, said in part: The second heading of the argument is that this could not logically be treated as a distribution in liquidation, "since no corporate action for dissolution had been taken." It is contended that a corporation cannot be "in dissolution" until after corporate action to that end by a stockholder's meeting properly convened. Without close examination, and solely for the purpose of this controversy, it might be conceded that a corporation is not "in dissolution" until proper action*1078 therefor has been taken as required by the governing law. This does not help petitioners. Whatever complaint, if any, the State of Delaware or interested creditors might have made is not of concern here. The question here is not what the corporation could do but what it did. It may or may not be that the corporation could not legally distribute its assets until after it had complied with certain requirements of its parent state, but it did do that very thing, and when it did so it created the situation to which the national taxing statute directly applied. *1104 In Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed.(2d) 619; affirming 22 B.T.A. 541, the Fifth Circuit, in holding a certain distribution to be one in liquidation, rather than an ordinary dividend, said: Proceedings actually begun to dissolve the corporation or formal action taken to liquidate it are but evidentiary and not indispensable. Tootle v. Commissioner, 58 Fed.(2d) 576. Again, the court, in commenting upon the fact that the dividend in question was paid out of surplus instead of capital, said: The fact that the distribution is*1079 wholly from surplus and not from capital, and therefore lawful as a dividend is only evidence. In Hellmich v. Hellman, and Tootle v. Commissioner, supra, the distribution was wholly from profits yet held to be one in liquidation. Petitioner in its brief contends that because the bill of sale was not signed by all the parties until November 20, 1926, the actual sale did not take place until that time. We do not think it is important to the question we have here to decide, to determine whether the sale of assets by the old company to the new company was completed when the bill of sale was signed and delivered, November 20, 1926, or when the option to purchase was exercised, October 29, 1926. The question we have to decide is not the question of when the sale was completed (the tax here involved is not one laid on that particular transaction), but whether the two dividends in question were declared in the ordinary course of business with intent to maintain the old company as a going concern or as a part of a plan to quit business and liquidate its remaining assets. Cf. *1080 Canal-Commercial Trust & Saving Bank v. Commissioner, supra. In Gossett v. Commissioner, 59 Fed.(2d) 365, affirming 22 B.T.A. 1279, the court said: Certainly at the time of the payment of the dividend in question the corporation was not a going concern, in the legal sense, as its dissolution was already under way. It makes no difference what the directors called it when the dividend was declared, nor does the fact that subsequent dividends were termed "liquidating" dividends when this particular dividend was not so termed alter its character. The question of whether it was a "partial liquidating dividend" is to be determined, not from what it was called, but by the facts as shown by the record. The record shows that it was a very unusual dividend, and entirely outside of the due course of the business of the corporation. The decision of the Commissioner and the Board that it was a "partial liquidating" dividend was clearly right * * *. The dividend in the Gossett case was declared after the stockholders had passed a resolution to dissolve, but, as we have already shown, such resolutions are only evidentiary and*1081 not indispensable. Canal-Commercial Trust & Savings Bank v. Commissioner, supra. At the time the distributions in the instant case were authorized the distributing company had sold the major portion of its assets, *1105 including the business, good will, and corporate name, and simultaneously with the declaration of the second distribution in question, its board of directors authorized the sale to petitioner of the remaining assets of The Broadway Department Store. The dividends could not have been paid until part of the selling price had been received. The dividend of $50 per share, declared November 10, 1926, was paid for the most part out of the first money received from the sale of the assets under the contract with Dillon, Red & Co. Cf. Tootle v. Commissioner, supra. In a matter of this kind the whole of the transactions must be viewed together from the beginning to the end, and in this view of the transactions we hold that each of the two distributions in question was distributed "in partial liquidation of a corporation" as that term is used in section 201(c), supra, and defined in subdivision (h) of the same section*1082 as being "one of a series of distributions in complete cancellation or redemption of all" of the stock of The Broadway Department Store, which "cancellation or redemption" occurred on or about December 24, 1926, at which time all the remaining assets were distributed and the corporation was disincorporated by duly constituted proceedings in law. Consideration will now be given to question number (2) as stated in the opening paragraph of this opinion. On or about August 1, 1922, petitioner issued 79,788 shares of its authorized capital stock of 80,000 shares to Arthur Letts and assumed liabilities in the amount of $601,600 in exchange for shares of various corporations enumerated in our findings of fact. Among these shares were 30,000 shares of The Broadway Department Store. What was the cost to petitioner of these 30,000 shares? It is apparent from the statement attached to petitioner's return that had it not been for petitioner's misconception of the applicability of section 204(a)(8) of the Revenue Act of 1926, it would have claimed a cost of $4,050,000 or $135 per share; but, thinking that section applicable, it claimed only a cost of $2,982,300, or $99.41 per share (cost*1083 to transferor, Arthur Letts). The latter amount was accepted by the respondent as the cost of the stock in his determination of the deficiency. The respondent's determination is prima facie correct and the burden of disproving it is upon petitioner. Austin Co. v. Commissioner, 35 Fed.(2d) 910; Wickwire v. Reinecke,275 U.S. 101. In Seymour Mfg. Co.,19 B.T.A. 1280, 1285, we said: "The cost of property acquired for stock is the 'fair market value' of the stock." To the same effect see Bay City Fuel Co.,20 B.T.A. 450; Hershey Mfg. Co.,14 B.T.A. 867, 872. In order, therefore, to determine the cost to petitioner of the 30,000 shares of The Broadway Department Store, the proper procedure would be to determine the *1106 fair market value of petitioner's 79,788 shares of stock on the basic date, and then determine how many of such shares were issued for the 30,000 shares of the old company. The latter factor may be ascertained from the allocation made by petitioner on its books in 1922, which is set out in full in our findings. *1084 It was stipulated that the transaction was set up on petitioner's books in the manner indicated in our findings of fact and there is nothing in the record to suggest that these values thus placed on petitioner's books were inflated. Cf. H. H. Champlin,28 B.T.A. 264; H. H. Blumenthal,21 B.T.A. 901. There were no sales of petitioner's stock (Holmby Corporation) at or about the basic date. The stock was closely held and not traded on any exchange or over the counter market. Under such circumstances it is proper to consider evidence tending to prove the fair market value, if any, of the assets acquired by petitioner. Ambassador Petroleum Co.,28 B.T.A. 868; Commissioner v. Swenson, 56 Fed.(2d) 544; Melville Hanscom et al., Executors,24 B.T.A. 173; Herman Adaskin,8 B.T.A. 460. Cf. also Walls v. Commissioner, 60 Fed.(2d) 347; Mount v. Commissioner, 48 Fed.(2d) 550; Patterson v. Commissioner, 42 Fed.(2d) 148; *1085 O'Meara v. Commissioner, 34 Fed.(2d) 390; and Mead Realty Co.,21 B.T.A. 1062. We think that the evidence fully supports petitioner's claim that the stock of the old company had a fair market value at the time it was acquired by petitioner in 1922 of $135 per share. The principal witness who testified on this point was Malcolm McNaughten. He was president of the new company and vice president of the old company, and was a director in petitioner. He testified that his opinion was that the stock of the old company had a fair market value of $135 a share on August 1, 1922, and that he believed this valuation was conservative. He testified that his opinion as to value was based on the fact that the book value of the tangible assets underlying the shares at that date was $125 per share; that the average net earnings of the corporation during the preceding four years were $13 per share and that the net earnings for 1922 were about $20 per share. In view of these facts, which were not contradicted by any evidence introduced by respondent, it is not difficult to believe that the stock of the old company had a fair market value of $135 per share*1086 at the basic date and that the stock of the Holmby Corporation (petitioner) was worth par, the price for which it was issued in payment of the 30,000 shares of stock in The Broadway Department Store (here involved) and other assets not involved in this proceeding. *1107 As to the value of petitioner's stock, the witness McNaughten testified in part as follows: Q. Did the stock of the Holmby Corporation have a fair market value at the time of issue? A. I have definitely considered it worth par, or $100 a share. Q. In your opinion, it was worth $100 a share? A. Yes. It is not difficult to believe that stock in the largest and one of the best known department stores in Los Angeles, with an earning power of $13 per share for the four years prior to the year of sale and with earnings of $20 in the year of sale, and with $125 worth of tangible assets behind each share, had a fair market value of $135 per share on the date in question. We think this valuation is confirmed by the fact that four years later the entire stock of the old company was liquidated at a price of upwards of $161 per share ($8,084,068.12 which we hold was the amount received in liquidation*1087 divided by 49,995 shares, the amount of stock owned by the petitioner in The Broadway Department Store at the time of its liquidation in 1926). Accordingly, respondent, in a redetermination of the profit resulting from the liquidation of these particular 30,000 shares of stock in 1926, should use as a basis of cost thereof the sum of $135 per share. Reviewed by the Board. Decision will be entered under Rule 50. Footnotes 1. SEC. 201. (a) The term "dividend" when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. * * * (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. * * * * * * (h) As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. ↩