Newbury v. Commissioner

MOLLIE NETCHER NEWBURY, TRUSTEE OF THE ESTATE OF CHARLES NETCHER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Newbury v. Commissioner Docket No. 42435. United States Board of Tax Appeals 31 B.T.A. 41; 1934 BTA LEXIS 1170; August 9, 1934, Promulgated *1170 1. Where the petitioner in the reorganization of a corporation exchanged 4,999 shares of stock in the old corporation, which had a March 1, 1913, value of $4,768,965.64, for 9,998 shares of no par value common stock in the new reorganized corporation and $3,655,518.25 in cash, held, the stock in the new corporation did not have a readily realizable market value at the time received by petitioner and no taxable gain resulted from the transaction. 2. Where the petitioner filed the appropriate return required of fiduciaries, and there is no income taxable to the fiduciary, but did not disclose the facts relative to a nontaxable transaction, the imposition of a penalty is improper. Joseph R. Little, Esq., and Laurence Graves, Esq., for the petitioner. Mason B. Leming, Esq., for the respondent. BLACK *42 This proceeding involves a deficiency in income tax of $342,704.88 for the year 1923 determined against the petitioner, Mollie Netcher Newbury, as trustee under the will of Charles Netcher, with a penalty of $85,676.22 for failure to file a return on time. The deficiency results from a determination by the respondent that the petitioner*1171 realized a taxable profit of $3,655,518.75 in the reorganization of a corporation by which she exchanged 4,999 shares of the common stock of the Netcher Store, Inc., formerly the Boston Store of Chicago, an Illinois corporation, hereafter sometimes referred to as the Illinois corporation, for 9,998 shares of the no par common stock of the Boston Store of Chicago, Inc., a Delaware corporation, hereafter sometimes referred to as the Delaware corporation, and $3,655,518.75 in cash. Petitioner alleges that this determination of respondent was erroneous because the stock of the Delaware corporation did not have a readily realizable market value at the time of exchange, and that inasmuch as the cash received did not equal the March 1, 1913, value of $4,768,965.64, of the stock in the old corporation, no taxable gain resulted. A stipulation was filed in which the parties agreed to many facts, but which we deem too lengthy to incorporate here in full. Also, considerable oral testimony was received at the hearing and many exhibits were received in evidence. From these we make the following findings of fact. FINDINGS OF FACT. Prior to 1903 Charles Netcher had for a number of years*1172 conducted a general merchandising business in Chicago, known as the Boston Store. It was located on the south half of block 58, original town of Chicago, on property bounded by State, Madison, and Dearborn Streets, and known as the busiest corner in the world. The business catered to customers of moderate means, described by some of the witnesses as the "shawl trade", and was operated on a cash basis. In 1903 an Illinois corporation, known as the Boston Store of Chicago, was formed with an authorized capital stock of 5,000 shares of common stock of the par value of $100 per share. The business was transferred to the corporation in exchange for its entire authorized capital stock, of which 4,999 shares were issued to Charles Netcher and one share was issued to his wife, Mollie Netcher, now Mollie Netcher Newbury. Charles Netcher died testate in 1904 and by the terms of his will he bequeathed and devised the residue of his estate, which comprised the major part thereof, to his wife in trust, to pay one third of the net income thereof to herself during her life, with power of appointment in her as to the remainder. It *43 was provided that the remaining two thirds of the*1173 net income of the principal trust estate should be divided annually or oftener, as the trustee should see fit, into equal shares and one share should be held in trust for each of testator's surviving children, or their issue. Provisions were made for proper education and care of his children and for payments to them of specific sums on arrival at designated ages. The trusts were to continue until his youngest grandchild was 21 years of age. Certain other provisions not material here provided for the ultimate disposition of the estate. Decedent's wife, Mollie Netcher, now Mollie Netcher Newbury, the petitioner herein, qualified as executrix and trustee and has ever since acted as trustee. She was clothed with ample and practically complete authority as to the management, control, and disposition of the trust estate, to buy, sell, invest, and reinvest as to her might seem best and to continue the business he was engaged in, but he expressed the desire that his real estate holdings in block 58, town of Chicago, should be held together for the benefit of his entire estate. In addition to homes in Chicago, Illinois, and Buffalo, New York, the testator died possessed of cash, notes, *1174 and insurance, amounting to $615,522.15, 4,999 shares of common stock of the Boston Store of Chicago, certain warehouse property on South State Street, Chicago, and the entire south half of block 58, original town of Chicago, lying south of Calhoun Place and bounded by Dearborn, Madison, and State Streets, which was owned by him in fee, or under lease, or under contract to purchase by him. The Chicago residence, with furnishings, was left to Mollie Netcher individually and the entire residue went to the trust estate. The Illinois corporation, at the time of Charles Netcher's death, and subsequent thereto, occupied most of the buildings on block 58. These were old and becoming inadequate for the needs of the business. After the death of Charles Netcher the petitioner became the head of the business and continued in the management thereof and of the trust estate during all the time mentioned herein. In 1904 or 1905 petitioner, as trustee of the Netcher trust estate, began the erection of a modern 17-story building, with three basements, upon the land formerly under lease, owned in fee, or under contract to purchase by decedent Netcher, the contracts to purchase having been consummated*1175 by petitioner. The building was erected in sections and since its completion in 1915 has been leased to and occupied by the Illinois company and its successor, the Delaware corporation. In order to pay for the construction of this building it was necessary for petitioner to borrow large sums of money, some of which were borrowed from the separate trusts created under the will of Charles Netcher for the benefit of his children. *44 In 1916 the petitioner entered into a lease with the Illinois corporation for the use and occupancy of the building, which had then been completed. This lease was for a period of 25 years and was to expire on, december 31, 1940. It called for the payment of an annual rental of $665,199.96 for the first 5 years, an annual rental of $755,682.60 for the next 5 years and an annual rental of $846,165.84 for the next 15 years, payable monthly in advance. In addition to these stipulated rentals the lessee was required to pay all taxes and special assessment taxes levied or charged on the property after the year 1918, and unpaid installments of special assessments levied previous to the year 1920 and unpaid in that year. On January 1, 1916, the*1176 Illinois corporation entered into a lease with Mollie Netcher Newbury, individually, for the property owned by her and located at the northeast corner of the south half of block 58, original town of Chicago. This lease was for a period of 25 years, to expire on December 31, 1940, and called for the payment of rentals as follows: $94,800 annually for the first 5 years, $101,285.88 annually for the next 5 years, and $107,771.88 annually for the last 15 years, all payable monthly and in advance. In addition to the specified rentals, the Illinois corporation was required to pay all taxes and special assessment taxes levied or charged on the property after the year 1918 and all unpaid installments of special assessments levied previous to the year 1920 and unpaid in that year. At the time of the transfer of the assets of the Illinois corporation to the Delaware corporation, referred to later in these findings of fact, the two leases last mentioned were transferred and assigned to the Delaware corporation. These leases were never capitalized or carried as assets on the books of either the Illinois or the Delaware corporation. The taxes paid by the Delaware corporation in 1924, for the*1177 year 1923, under these leases aggregated the sum of $277,436.02. The separate trusts for the benefit of decedent's children were duty set up on petitioner's accounts and each credited with its portion of the net income of the principal trust, but separate funds or investments were not set aside for any of them. The most of the funds of these separate trusts were borrowed and used by petitioner in erecting the building and in completing the contracts of purchase of real estate held by the decedent. On December 31, 1922, the petitioner, as trustee of the principal trust, was indebted to the four separate trusts for money borrowed in the aggregate amount of $2,872,433.83. The principal trust also had a mortgage indebtedness of $3,750,000 on that date and it was indebted to the Boston Store to the extent of $119,498.20 and to Mollie Netcher Newbury, individually, in the amount of $80,871.49, making a total indebtedness on that date of $6,822,803.52. *45 Petitioner was advised by her attorney that it was her duty to set up and maintain with separate funds the separate trusts for the children of the testator, Charles Netcher. In order to accomplish this it was determined*1178 that a new corporation should be organized to acquire the business of the Illinois corporation, that the new corporation should issue and sell a $4,000,000 note issue, and exchange its entire capital stock and the proceeds of the note issue for the entire capital stock of the Illinois corporation, thus providing petitioner with funds for the establishment of the separate trusts. The Boston Store of Chicago, Inc., was incorporated under the laws of the State of Delaware, with an authorized capital stock consisting of 10,000 shares of no par value common. It entered into negotiations with Ames, Emerich & Co., investment bankers of Chicago, New York, and Milwaukee, for the sale of a note issue of $4,000,000. Ames, Emerich & Co. finally agreed to and did purchase an issue of $3,750,000 6 percent serial notes, under the following conditions: (a) That the issue be personally guaranteed by Mollie Netcher Newbury; (b) That current assets of $4,000,000 be maintained; (c) That the corporation should make no dividend distributions except out of earnings after April 1, 1923; (d) That such notes be paid within a period of eight years, $470,000 for each of the first seven years and*1179 $460,000 the eighth year. In advertising the $3,750,000 guaranteed 6 percent serial gold notes of the Boston Store of Chicago, Inc., of Delaware, for sale, Ames, Emerich & Co. made the following statement in their printed advertisement: For information regarding these Notes we refer to the accompanying letter of Mr. Charles Netcher, President of the Company, which states that: BUSINESS The Boston Store is the second largest department store in Chicago, and is the second larges strictly cash store in America. It was established in 1873, and from a very small beginning has prospered and grown steadily until today it occupies a building covering half a city block. Its assets have grown to their present proportions wholly out of earnings. The business was incorporated under the laws of Illinois in June, 1903, by Charles Netcher. Since his death in 1904 Mrs. Mollie Netcher Newbury has been primarily responsible for the development of the business. This growth is indicated by comparing the Company's business, $5,500,000 in 1903, with that of over $28,500,000 in 1922. The business is now being incorporated under the laws of Delaware, and its ownership and management will be*1180 identical with that of the previous company. GUARANTY The Notes, which will be the direct obligation of the Company, will be guaranteed principal and interest by Mollie Netcher Newbury. The estimated present value of the assets owned by the guarantor is approximately $10,000,000 (exclusive of stock in this Company). ASSETS According to the accompanying certified balance sheet, net tangible assets available for the payment of these Notes are $7,502,549, or approximately twice the amount of this Note issue. Of this amount $4,334,937 is net current assets. *46 EARNINGS In no year since its incorporation has the Boston Store failed to earn a profit. The worth of the Netcher Estate is about $20,000,000 and that of Mrs. Newbury about $10,000,000 (exclusive of stock in this company). This wealth has come primarily from the Boston Store and represents its earning power. The audited combined income account of the predecessor corporation and the guarantor shows average net income during the past five years, before Federal Income Taxes, of $1,533,967, or equal to more than seven times the maximum annual interest requirements on these Notes. Combined net income after Federal*1181 Income Taxes for the same period averaged $921,298. SAFEGUARDS The agreement under which these Notes will be issued provides that during the life of the Notes (a) the Company will make no distribution to its stockholders in the form of dividends or otherwise, except out of profits earned after April 1, 1923, and (b) the Company shall maintain net current assets as defined of not less than $4,000,000. MANAGEMENT The entire capital stock of Boston Store of Chicago, Inc., will be owned by the Netcher Estate and Mrs. Mollie Netcher Newbury. Mrs. Newbury, as Chairman of the Board, will continue to control the policy of the business. On the back of the circular advertising the guaranteed 6 percent serial gold notes for sale was a balance sheet of the Boston Store of Chicago, Inc. (Delaware corporation), as at January 20, 1923 (after giving effect to the proposed financing). It is as follows: ASSETS CURRENT ASSETS: Cash in Banks and on Hand $655,574.64 U.S. Government Liberty Loan Bonds and Treasury Certificates (at cost or market, whichever is lower) 875,661.15 Notes Receivable 26,000.00 Accounts Receivable 205,137.90 Merchandise Inventory (at cost or market, whichever is lower) 3,228,787.50 Merchandise in Transit (at cost) 65,085.04 ------------- TOTAL CURRENT ASSETS $5,056,246.23 FIXED ASSETS: (Sound Value as Appraised by Independent Appraisers) Land (Unencumbered) $75,750.00 Buildings (Barns and Warehouses) 245,072.00 Machinery, Fixtures and Delivery Equipment 2,620,963.45 ------------- $2,941,785.45 INVESTMENT 2,500.00 DEFERRED CHARGES: Prepaid Rent, Insurance, Catalogue, Supplies, and Unamortized Discount 223,325.56 GOOD WILL 1.00 --------------- $8,223,858.24 ----------------------------------------------------------------------- LIABILITIES CURRENT LIABILITIES: Accounts Payable - Trade Creditors $178,520.15 Others 40,925.96 Accrued Real, Personal and Federal Taxes 386,092.20 Accrued Payroll 87,025.91 Accrued Liability Insurance 28,744.81 ------------- TOTAL CURRENT LIABILITIES 721,309.03 Serial 6% Gold Notes (this issue) 3,750,000.00 CAPITAL: Authorized and Issued - 10,000 Shares No Par Value Stock 3,752,549.21 --------------- $8,223,858.24 *1182 *47 This same balance sheet was furnished to the Secretary of State of Illinois to comply with the Illinois Securities Law and its contents were sworn to by Charles Netcher, president of the Delaware company. The Delaware corporation sold the note issue of $3,750,000 to Ames, Emerich & Co. and received $3,656,250 therefor. On April 24, 1923, the name of Boston Store of Chicago, the Illinois corporation, was changed to the Netcher Store, Inc. On April 26, 1923, the Delaware corporation exchanged its 10,000 shares of no par value stock and $3,656,250 for the stock of the Illinois corporation, as a result of which the petitioner received 9,998 shares of Delaware corporation stock and $3,655,518.75 in cash. The business and assets of the Illinois corporation were thereupon transferred to the Delaware corporation, as of February 1, 1923. The Delaware corporation had no assets prior to the acquisition of the assets of the Illinois corporation, except the capital stock of the Illinois corporation. Both the Illinois corporation and the Delaware corporation kept their accounts and made their income tax returns on the basis of a fiscal year ending January 31. Prior to the*1183 fiscal year 1909 and in the years ending January 31, 1909 to 1913, inclusive, the following amounts were paid by the Illinois corporation to its stockholders: Prior to 1909 $585,000.00 [1909] 142,954.32 [1910] 370,000.00 [1911] 50,000.00 [1912] $500,000.00 [1913] 745,000.00 ------------- Total 2,392,954.32 No dividends were declared or paid during the years ending January 31, 1919 to 1922, inclusive. For the year ending January 31, 1923, dividends in the amount of $450,000 were paid. *48 The net taxable income of the Illinois corporation for the fiscal years ending January 31, 1910 to 1923, inclusive, before deduction for the statutory exemptions, was as follows: [1910] $417,372.16 [1911] 294,144.56 [1912] 789,830.29 [1913] 864,869.25 [1914] 627,907.66 [1915] 530,020.68 [1916] 561,377.54 [1917] $1,105,799.62 [1918] 667,007.76 [1919] 1,304,920.53 [1920] 2,034,723.94 [1921] 436,739.17 [1922] 667,325.44 [1923] 680,329.03 The gross sales and gross profits of the Illinois corporation for the years ending January 31, 1906 to 1923, inclusive, and of the Delaware corporation for the years ending January 31, 1924 to 1928, inclusive, were as*1184 follows: Year Gross sales Gross profits [1906] $7,647,233.19 $1,778,960.63 [1907] 7,744,787.04 1,899,386.50 [1908] 9,077,144.69 2,342,643.52 [1909] 10,105,380.86 2,571,848.65 [1910] 10,716,335.95 2,879,844.51 [1911] 10,475,415.11 2,947,840.48 [1912] 11,944,984.05 3,543,470.41 [1913] 13,101,758.61 3,931,370.08 [1914] 14,008,049.55 5,355,942.45 [1915] 13,862,370.21 4,600,621.10 [1916] 13,843,994.11 4,660,893.99 [1917] 15,865,765.44 6,068,406.84 [1918] $17,021,203,90 $5,264,649.05 [1919] 20,304,532.51 7,174,705.43 [1920] 26,597,625.20 9,018,419.44 [1921] 32,487,965.82 8,542,077.32 [1922] 30,418,620.08 8,518,572.26 [1923] 28,516,377.70 8,844,084.23 [1924] 29,805,622.00 8,484,958.53 [1925] 27,676,913.41 8,237,560.86 [1926] 26,341,273.06 7,957,401.20 [1927] 25,563,420.03 7,741,843.09 [1928] 23,361,379.12 7,162,780.09 The business of the the Boston Store, both prior and subsequent to its incorporation in 1904, was a cash business. From 1913 to 1923 there were a number of changes in business conditions which affected the business of the Boston Store. Other department stores in Chicago, such as Marshall Field & Co. and Mandel Brothers, opened*1185 bargain basements. Stores were opened in the outlying sections of the city which catered to the same trade as the Boston Store. These stores were open one or more nights a week, including Saturday night. Owing to the character of the trae existing in the Loop district it was found unprofitable to the Boston Store to remain open evenings. The deferred payment plan of merchandising also developed. The Boston Store did not employ this method of selling. It sold for cash only. The material increase in parking restrictions in the Loop district during this period adversely affected the business of the Boston Store. For the fiscal year ending January 31, 1923, the gross sales of the Boston Store were $28,516,377.70, compared to $30,418,620.08 for the fiscal year ending January 31, 1922, and $32,487,965.82 for the fiscal year ending January 31, 1921. The gross *49 sales decreased from the above figures for 1921 to a figure of $23,361,379.12 for the fiscal year ending January 31, 1928, a decrease of $8,926,586.70 in a period of seven years. On March 15, 1924, petitioner filed a fiduciary return of income on Form 1041 for the calendar year 1923. The income reported on this*1186 return was from rents and royalties and from dividends on stock of domestic corporations. No income was reported as resulting from the exchange of 4,999 shares of stock of the Illinois corporation for 9,998 shares of stock in the Delaware corporation and $3,655,518.75 in cash. No income tax return on Form 1040 was filed by petitioner, she contending that under the terms of the will all the net income shown on Form 1041 was currently distributable to the beneficiaries named therein and therefore taxable to the beneficiaries and that there was no taxable income of the fiduciary to report resulting from the exchange of stock plus cash mentioned above. The 9,998 shares of the no par value common stock of the Boston Store of Chicago, Inc., receieved by the petitiner on April 26, 1923, had no readily realizable market value on that date. In his determination of the deficiency, the Commissioner determined that the March 1, 1913, fair market value of the 4,999 shares of common capital stock of the Illinois corporation was $4,768,965.64, which was greater than cost. The petitioner does not contest the correctness of this determination. OPINION. BLACK: The principal question involved*1187 herein is one of fact, viz., whether or not the stock received by petitioner in the new Delaware corporation had a readily realizable market value when petitioner acquired it. The respondent determined that the stock in the Delaware corporation had a readily realizable market value at least of equal value with the March 1, 1913, fair market value of the stock in the old Illinois corporation, which he fixed at $4,768,965.64; and that consequently the entire cash payment of $3,655,518.75 constituted profit and taxable income to the petitioner. Petitioner, on the other hand, claims that the stock in the Delaware corporation did not have a readily realizable market value when she received it in exchange for the stock in the Illinois corporation, and that inasmuch as the $3,655,518.75 cash was less than the March 1, 1913, fair market value of $4,768,965.64 of the stock in the Illinois corporation, no taxable income resulted. Petitioner claims that the amount of cash received, under the applicable provisions of the revenue act, goes to reduce the basis. *50 The applicable provisions of the Revenue Act of 1921, as amended by the Act of Congress of March 4, 1923, effective January 1, 1923, are*1188 printed in the margin. 1 *1189 *51 In , we thoroughly considered the question of the meaning and application of the term "readily realizable market value" as used in the quoted section of the Revenue Act of 1921, and it would serve no useful purpose to again review the authorities therein cited. It is sufficient to say that our interpretation of the term was substantially the same as the Commissioner has defined it in his regulations. In the Eisendrath case an Illinois corporation, with a capital stock of 500 shares of the par value of $100 each, was engaged in the tanning business in Chicago, Illinois. It had been very prosperous from its organization in 1904 until after the World War, when the tanning business began to decline. The March 1, 1913, fair market value of its shares was $1,410.03 for each share. In 1923 a reorganization was effected, by which a Delaware corporation was organized with a capital stock of 25,000 shares of the par value of $100 each and exchanged its entire issue of 25,000 shares and $700,000 cash in addition for the 500 shares of stock in the old Illinois corporation. Each stockholder in the old Illinois corporation*1190 received in exchange for each share of his stock therein 50 shares of stock in the new Delaware corporation and $1,400 in cash. The respondent in that case determined that the shares of stock exchanged were of equal value and that the stock of the Delaware corporation had a readily realizable market value, and that the entire additional cash payment was profit and constituted taxable income to the recipients. We held, however, that the stock of the new Delaware corporation did not have a readily realizable market value, and as the cash received of $1,400 per share did not equal or exceed the March, 1, 1913, value of $1,410.03 per share, no taxable gain resulted. In the instant case the Commissioner has determined, as he did in the Eisendrath case, that the stock of the Delaware corporation which petitioner received in exchange for the stock which the estate owned in the Illinois corporation had a readily realizable market value at least equal to the March 1, 1913, value of the stock in the Illinois corporation and that hence all the cash received in the transaction was taxable gain. This determination of respondent is presumed to be correct, and so many decisions have held*1191 that to be true that it is unnecessary to cite authorities. Petitioner recognizes this to be true and has offered much evidence to rebut the determination made by respondent. Petitioner has made no effort to prove that the stock did not have value. Indeed it is quite clear that the stock did have value - much value - because it unquestionably had large assets behind it, but that is not saying that under the circumstances existing at the time of exchange it had a readily realizable market value. As we said in *52 , "Before such a transaction is considered to give rise to taxable gain under the statute, the property received in the exchange must have a readily realizable market value, i.e., be practically the equivalent of cash." We do not think we can hold that the stock of the Delaware corporation to the extent of its fair value was practically the equivalent of cash at the time it was received. We feel constrained to hold that the weight of the evidence is against the conclusion that the stock of the Delaware corporation had a readily realizable market value at the time of the exchange. Under these circumstances the*1192 cash which petitioner received in the transaction will go to reduce the basis of the Delaware corporation stock and any gain in the transaction to be taxable will have to await the future disposal of the stock. Such we believe was the intent of the statute which we have quoted in the margin. Seven qualified witnesses testified for the petitioner relative to the marketability of the stock in the Delaware corporation, some of whom were participants in the reorganization and loan transactions. The stock was not listed on any exchange and there had been no sales of any shares. All of these witnesses testified that the stock did not have a readily realizable market value at the time of the exchange. They gave various reasons for their opinions and we do not deem it necessary to report their testimony in detail in this discussion. We think it will suffice to give a summary of their reasons and this summary may be stated briefly, as follows: Under the trust indenture of April 1, 1923, which the Delaware corporation had to give to secure its gold note issue of $3,750,000, it was prohibited from paying any dividends out of anything except earnings which might accrue to the company*1193 after April 1, 1923. It had a principal obligation, plus interest, to meet under that indenture, in excess of $4,704,000 over a period of eight years. Current assets of $4,000,000 at all times had to be maintained. Therefore the $4,704,000 which had to be paid over this term of eight years could only be paid out of future profits after April 1, 1923. The person who would want to buy the stock as of April 26, 1923, would therefore have to agree to pay off $4,704,000 out of future earnings, which would make the chances for any distributable dividends during that time very slim. The stock was not salable unless the person buying it could in a manner satisfactory to Mrs. Newbury, indemnify her and save her harmless from the personal guaranty which she had given to the purchasers of the $3,750,000 gold notes of the Delaware corporation. Under the leases the rentals and taxes amounted to approximately $1,250,000 annually and were burdensome, considering the volume of annual sales of the corporation, *53 and constituted a prior lien against the assets of the corporation in addition to the heavy payments on the note issue before anything was available for distribution as profits. *1194 One witness, who was a negotiator for the sale or purchase of large department stores, testified he had attempted to interest Isaac Gimbel of Gimbel Bros. of New York, Jesse Straus of Macy & Co. of New York, Samuel Mundheim of Kaufman's of Pittsburgh, S. S. Kresge of the S. S. Kresge Stores, and Morton May of the May Department Stores of St. Louis, in purchasing the Boston Store of Chicago (Delaware corporation), but without success. He testified that the shares of stock in the Delaware corporation did not have a readily realizable market value, nor a fair market value, and gave as reasons substantially the same reasons as we have set out in detail in the foregoing summary. In view of this testimony we think that petitioner has overcome the presumptive correctness of respondent's determination and that it was incumbent upon the Commissioner to offer evidence in rebuttal which would have satisfactorily established that the stock of the Delaware corporation did have a readily realizable market value at the time of the exchange. This we do not think he has done. Therefore, on this issue, we find in favor of petitioner. The respondent in determining the deficiency added 25*1195 percent thereof, amounting to $85,676.22, as a penalty for failure to file a return on time. Apparently this was imposed under section 3176, Revised Statutes, as amended by section 1103, Revenue Act of 1926, which provides in part as follows: In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the Collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. It is not disputed that the petitioner did file a fiduciary return on Form 1041 in time, but on advice of tax accountants no report was made of the transaction herein involved, on the theory that it was not taxable and no profit for taxation on Form 1040 was returned. Since we have held that there is no tax due from the petitioner on the transaction, it follows that the imposition of the penalty was improper. Reviewed by the Board. Decision will be entered for the petitioner*1196 that there is no deficiency and no penalty. Footnotes 1. SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that - * * * (b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but - (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market value or price; [Italics supplied]. * * * (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 unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized - * * * (2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stocks or securities in a corporation a party to or resulting from such reorganization. The word "reorganization," as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form or place of organization of a corporation, (however effected); * * * (e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the mney or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2) and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange. ↩