Swiss Oil Corp. v. Commissioner

SWISS OIL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Swiss Oil Corp. v. Commissioner Docket Nos. 60177, 61002, 63088, 70998. United States Board of Tax Appeals 32 B.T.A. 777; 1935 BTA LEXIS 891; June 14, 1935, Promulgated *891 1. The taxpayer had a contract with the stockholders of a corporation whereby the taxpayer had a right to purchase all of the stock of the corporation, subject to the right of the stockholders to withdraw some of the assets of the corporation. The taxpayer made an initial payment under this contract. The stock was then placed in escrow until the corporation, under the management of the vendor stockholders, had earned and paid as a dividend to the taxpayer a stated amount, which the latter paid over to the vendors as a second payment. The stock was then delivered to the taxpayer, which thereupon caused the corporation to execute to the vendors a mortgage on its properties for the balance of the purchase price. Shortly thereafter the taxpayer liquidated the corporation and acquired all of its assets, except those reserved, and assumed all of its liabilities, including the obligation under the mortgage. Held, that for tax purposes there were two separate transactions - a purchase of stock and a liquidation of the corporation - and the separate transactions may not be treated as constituting but steps in a single transaction whereby the taxpayer purchased the assets of the corporation. *892 Prairie Oil & Gas Co. v. Motter, 66 Fed.(2d) 309, distinguished. 2. Where property is acquired for stock the cost of the property is the fair market value of the stock, and while in some cases, e.g., where a corporation having no assets and no liabilities issues all of its outstanding stock for property, the value of the property is sometimes taken as evidence of the value of the stock paid for it, such rule can not reasonably be applied in cases where a corporation having assets and liabilities and outstanding stock acquires property by issuing additional stock. 3. Although the cost of a contract to purchase property may form part of the cost of the property purchased under the contract, the cost of obtaining cash can not be added to the cost of property purchased with the cash in a separate transaction. 4. In exchange for cash in the amount of $1,750,000 with which to make the initial payment under the contract referred to above (par. 1) the petitioner issued $2,000,000 face value of bonds and $2,000,000 par value of its stock to bankers, and, for the purpose of determining the cost of the stock purchased as stated above (par. 1), it contended that*893 it also acquired from the bankers the contract to purchase said stock. The evidence does not warrant a finding that the contract was or was not transferred by the bankers to the petitioner, but, assuming that it was, the evidence shows that the petitioner paid the bankers nothing for the contract, and hence the transaction with the bankers can in no way affect the cost of the stock purchased by the petitioner. 5. The fact that the Commissioner in a prior year denied the petitioner's claim of a deduction for amortization of discount on the bonds issued to the bankers, on the ground that the petitioner's stock and the alleged discount should be capitalized as part of the cost of the stock purchased by the petitioner, does not estop him to deny that the stock and bonds issued to the bankers were a part of the cost of the stock purchased. 6. The taxpayer realized a gain in the liquidation of the corporation whose stock it purchased, measured by the difference between the fair market value of the assets received in the liquidation and the cost of the stock, and it is entitled to depletion deductions based on the stipulated value of the depletable properties on the date they were*894 received in the liquidation. John E. McClure, Esq., and R. N. Miller, Esq., for the petitioner. H. A. Cox, Esq., for the respondent. MURDOCK *778 The following table shows the deficiencies determined by the Commissioner and the docket number under which each deficiency is contested: Docket No. Year Deficiency 60177 — 1926 — $18,827.85 61002 — 1927 — 77,136.36 Do — 1928 — 59,018.18 63088 — 1929 — 17,148.97 70998 — 1930 — 26,333.31 *779 Several of the issues raised by the pleadings have been settled by stipulation and need no discussion herein. Two questions are presented for decision by the Board. The petitioner assigns as error the action of the Commissioner in failing to allow, for the years 1926 to 1930, inclusive, prior deductions for depletion on oil and gas leases which it had acquired in 1926 from Union Gas & Oil Co. The respondent claims an increased deficiency for 1926 on the ground that he erred in failing to include in the petitioner's income for 1926 a gain of $2,906,043.32 which the petitioner realized in that year from the liquidation of the Union Gas & Oil Co. FINDINGS OF FACT. The petitioner*895 was organized in 1918 under the laws of Kentucky. It was engaged in the business of producing, refining, and selling petroleum and its products. Thomas A. Combs, a director and the president of the petitioner, was authorized in January 1924 to negotiate on behalf of the petitioner for the purchase of the properties or the capital stock of the Union Gas & Oil Co. (hereinafter referred to as Union). Union was organized in 1917 under the laws of Indiana. Its authorized capital stock consisted of 10,000 $25 par value shares. Combs and his agent, Thraves, in their own names, but acting as agents for the petitioner, entered into a written contract with the owners of the stock of Union. This contract was dated July 29, 1924. The stockholders of Union by this contract gave to Combs and Thraves an option to purchase the entire capital stock of Union within 90 days. The sellers were to deposit the stock in escrow if and when the option was exercised and the purchasers were to pay at that time $1,500,000 in cash. The sellers were to continue to operate Union until they had received net proceeds from the conduct of its business amounting to $1,000,000, with 6 percent interest thereon. *896 As soon as the sellers had received that sum, the escrow agent was to deliver the stock to Combs and Thraves, or their assigns, at which time the purchasers' title to the stock was to become absolute and the purchasers, at the same time, were to cause Union to execute and deliver to a trustee for the sellers its promissory notes amounting to $2,500,000, secured by a first mortgage on its properties. The petitioner was also to pay, out of the earnings of Union, interest on $2,500,000 from the date of the cash payment of $1,500,000 until the date of execution of the mortgage notes. Combs and Thraves assigned their interest in the option to the petitioner within a few days after July 29, 1924. The petitioner made numerous unsuccessful efforts to raise the funds necessary *780 to enable it to exercise the option and purchase the stock. During this time Combs obtained several extensions of the opinion. The last extension was to January 12, 1925. In connection with these extensions he paid $75,000 to the stockholders of Union and it was agreed that this amount should be credited upon the purchase price of the stock in the event that the option was exercised. The petitioner*897 reimbursed Combs for these payments. After obtaining the last extension Combs again assigned all of his interest in the option and the extensions thereof to the petitioner. Combs gave written notice to the sellers on January 12, 1925, that he was electing to purchase the stock. He agreed to complete the initial payment of $1,500,000 on February 2, 1925. The petitioner paid the sellers the remainder of the initial payment ($1,500,000 less $75,000) on February 2, 1925. The owners of Union stock deposited it on the same day with the Union Trust Co. of Indianapolis and authorized that bank to deliver the stock to the petitioner (a) when and as soon as the sellers had received $1,000,000, plus certain interest, from the operation of the business of Union, and (b) upon delivery to the bank of the promissory notes and mortgage of Union for $2,500,000 provided for in the agreement of July 29, 1924. The sellers of the Union stock remained in control of that company until on or about January 2, 1926. Earnings of Union during the year 1925 amounting to $1,000,000, plus interest on that amount and interest on $2,500,000, were received by the sellers of Union stock. The earnings were*898 declared as dividends to the petitioner and then paid over to the sellers. The petitioner, the Ashland Refining Co., and Union filed a consolidated return for the year 1925, which included income and deductions of Union for the period February 2, 1925, to December 31, 1925. The sellers received a payment on December 30, 1925, which completed the amounts which they were to receive out of earnings of Union. The stockholders, in the option agreement of July 26, 1924, assumed certain liabilities and reserved to themselves certain assets of Union, consisting of cash, securities, notes and accounts receivable, furniture, and material and supplies. While the stock was in escrow some of these assets were distributed to those stockholders in kind, but others were left with Union and the stockholders received cash in lieu thereof. On January 2, 1926, some of the assets reserved to the old stockholders, or cash, or both, were transferred to trustees to pay the liabilities assumed and to transfer any balance to the old stockholders. The bank delivered the Union stock to the petitioner on January 2, 1926. On that same day Union executed and delivered its notes for $2,500,000 to the bank*899 *781 and executed a mortgage on its properties as security for the notes. Thereafter Union liquidated by transferring all of its assets, subject to its liabilities, to the petitioner at some time in January 1926. Among the liabilities of Union assumed by the petitioner was the liability for the mortgage and notes given to the sellers. Thereafter after the petitioner paid the mortgage notes in full and the mortgage was satisfied on October 16, 1928. The cost of the Union stock to the petitioner was not more than $5,000,000. The stipulated fair market value of the net assets (total assets received less liabilities assumed) which the petitioner received upon the liquidation of Union was $7,906,043.32 at the time they were received. The deductions which the Commissioner allowed for the years 1926 to 1930, inclusive, on account of depletion of the properties which the petitioner received from the liquidation of Union at the beginning of 1926, were not based upon the fair market value of the properties at the time they were received by the petitioner, but were computed upon smaller bases which had been used in prior years in computing the deductions allowed to Union. The*900 parties have stipulated that the depletable properties received by the petitioner in liquidation of Union had an aggregate fair market value at the time received of $7,486,178.18, and they have further agreed upon the amount of the deductions to which the petitioner will be entitled in case it is entitled to deductions for depletion based upon the value stipulated. The petitioner's basis for depletion of the above mentioned properties for the years 1926 to 1930, inclusive, is $7,486,178.18. The money with which the petitioner paid the balance of the initial payment ($1,425,000) to the sellers from whom it purchased the Union stock was obtained from Pynchon & Co., a firm trading in securities. J. L. Martin, one of the partners of Pynchon & Co., was one of the directors of the petitioner. He was present at a meeting of the board of directors of the petitioner held on January 10, 1925. Combs reported at the meeting that the option was about to expire and that he had been unable to secure the necessary financing. Martin said that Pynchon & Co. might furnish the petitioner with $1,750,000 in cash in return for $2,000,000 in notes and $2,000,000 in stock of the petitioner. The*901 general counsel of the petitioner said that in his opinion the issuance of $2,000,000 par value of its notes and $2,000,000 par value of its stock by the petitioner for $1,750,000 in cash would be in violation of the laws of Kentucky because the corporation would be receiving less than par value for its securities. He suggested that in order to make the transaction legal the option should be exercised on behalf of Pynchon & Co., and Pynchon & Co. *782 should then transfer the contract to purchase the Union stock, together with $1,750,000 in cash, to the petitioner, in return for $2,000,000 par value of the petitioner's notes and $2,000,000 par value of the petitioner's stock. Martin said that he would try to get his copartners in Pynchon & Co. to furnish the necessary funds to enable the petitioner to purchase the Union stock. The directors adopted a resolution authorizing Combs, "in view of the inability of the company to exercise the option and comply with its terms", to "make the best arrangement and disposition of the option possible in his discretion, having in view the desirability of securing to the company, if possible, the right to hereafter purchase the property*902 upon some practicable terms." Martin notified Combs the next day by telegram that Pynchon & Co. would "handle the deal as planned." Combs then exercised the option. Combs and Martin thereafter conferred as to the terms of the agreement to be made between Pynchon & Co. and the petitioner. Combs reported to the directors of the petitioner at a meeting on January 26, 1925, that he had exercised the option and had assigned the contract for the purchase of the Union stock at the direction of Pynchon & Co. to George M. Lindsey, as trustee for Pynchon & Co., in order to enable Pynchon & Co. to make an offer to the petitioner. He further reported that Pynchon & Co. offered to provide the petitioner with $1,750,000 in cash and to transfer to the petitioner the contract for the purchase of the Union stock, in consideration of the issuance and delivery to Pynchon & Co. by the petitioner of $2,000,000 par value of the petitioner's notes and $2,194,000 par value of the petitioner's capital stock. The $1,750,000 was to be used as follows: $75,000 was to reimburse the petitioner for the amount already advanced to the sellers; $1,425,000 was to be used to pay the remainder of the initial cash*903 payment required on the contract; $140,000 was to be set aside to guarantee the interest on the notes for the first year; and the balance was to be available to the petitioner for general corporate purposes. The petitioner, on the same day, January 26, 1925, entered into a contract with Pynchon & Co. by the terms of which Pynchon & Co. agreed to procure for the petitioner an assignment of the contract of July 29, 1924, for the purchase of the stock of Union, and to pay the petitioner $1,750,000 in cash, in consideration for which the petitioner agreed to issue to Pynchon & Co. $2,000,000 par value of its 7 percent three-year gold notes dated January 15, 1925, secured by a trust indenture and $2,194,000 par value of its common stock. The petitioner also agreed to provide a cash deposit of $140,000 for the payment of interest on the notes for the first year and to indemnify Pynchon & Co. against any liability upon any obligation to make the future payments for *783 the Union stock. Pynchon & Co. agreed to hold $194,000 par value of the stock issued to it for the benefit of the petitioner. This stock was issued and held for the petitioner for the purpose of avoiding violation*904 of a law limiting the amount of money borrowed to a certain percentage of the amount of capital stock outstanding. The petitioner, on January 31, 1925, executed and delivered the notes and issued the stock in accordance with the agreement of January 26, 1925. It received from Pynchon & Co. a check for $1,425,000, which it delivered to the sellers of the Union stock on February 2, 1925. The remainder of the $1,750,000, with certain adjustments for interest, was deposited in a bank to the credit of the petitioner by Pynchon & Co. on February 3, 1925. The total amount of the three-year gold notes issued to Pynchon & Co. was outstanding on December 31, 1925, and there were outstanding $1,910,000 of the notes on December 31, 1926, and $1,425,500 on July 31, 1927. Combs, contrary to the report he made to the board of directors of the petitioner, had not assigned the contract for the purchase of the Union stock to George M. Lindsey, or any other person, as trustee for Pynchon & Co. At some time after January 26, 1925, Combs executed a writing dated January 26, 1925, stating that he thereby assigned all of his right, title and interest in the option to George M. Lindsey, trustee. *905 Thereafter Lindsey accepted the assignment and on the same day executed a writing stating that he assigned his interest to the petitioner. Lindsey was an employee of Pynchon & Co. The authorized capital stock of the petitioner at all times material hereto during the year 1925 consisted of 1,000,000 shares of $5 par value common stock, of which $2,806,000 par value was issued and outstanding prior to the issuance of any stock to Pynchon & Co. The total fair market value of the $2,000,000 par value of its notes and $2,000,000 par value of its stock which the petitioner delivered to Pynchon & Co., pursuant to the contract of January 26, 1925, was $1,750,000 at the time the notes and stock were delivered. The Commissioner, in determining the deficiency for 1926, did not include in the income of the petitioner any amount representing a profit from the liquidation of Union. OPINION. MURDOCK: The affirmative issue raised by the Commissioner will be discussed first. The parties have vigorously contested this point in able and extensive briefs. Section 201(c) of the Revenue Act of 1926 provides that "amounts distributed in complete liquidation of a corporation shall be treated*906 as in full payment in exchange for *784 the stock" and "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." None of the exceptions contained in section 203 applies. The general rule of section 203(a) is that the entire amount of the gain determined under section 202 shall be recognized. That gain is the excess of the amount realized from the exchange of the stock over the cost of the stock. The amount realized is the fair market value of the property received. Sec. 202(a) and (c). Thus, if the petitioner bought the Union stock and paid no more than $5,000,000 for it, it realized a taxable gain of $2,906,043.32 in 1926 from the liquidation of Union. The Commissioner has the burden of proving that the petitioner realized a gain in 1926 from the liquidation of Union which should be included in the petitioner's income for 1926. The petitioner became the sole stockholder of Union and received in liquidation of Union the assets of that corporation subject to its liabilities. The parties have stipulated that the value of the net amount of property received*907 in the distribution was $7,906,043.32. The Commissioner contends that the excess of this amount over the cost of the Union stock to the petitioner was taxable gain for 1926. He concedes that the cost of the stock was $5,000,000, 1 but claims that it was no more than that amount. He therefore subtracts the cost of $5,000,000 from the amount realized, $7,906,043.32, to show a gain of $2,906,043.32. He has fully sustained the burden of proof on this issue. The petitioner has advanced a number of arguments in opposition to the tax. First it contends that the purchase of the stock and the liquidation of Union must be disregarded for tax purposes because they were but parts of a single transaction which had for its purpose the acquisition of the assets of Union. It argues that its intention to acquire the properties of Union is shown by the following facts, among others: It needed new properties*908 to make its business profitable; the old stockholders of Union were allowed to take out a substantial amount of the assets of Union which were not desired by the petitioner; and the petitioner dissolved Union and took over its assets at the earliest possible date under the contract to purchase. It relies very strongly upon the case of . The collector was there contending that the properties were acquired in connection with a reorganization and Prairie was not entitled to a stepped-up basis for depletion of cost to it, but had to take the same basis as applied to Olean. See also *785 . Here neither party is contending that there was a reorganization and it is clear that there was none. Cf. . The contract in the Prairie case was between Prairie, as buyer, and Olean and its stockholders, as sellers. The purchase price was paid to agents of the selling corporation and its stockholders. The contract there recited that its purpose was to transfer the leases owned by Olean for cash. *909 Delivery of the physical properties was to be made as of a date five days before the contract was signed. Alternative methods of effecting the transfer of the physical properties were provided for - one by the transfer of the properties themselves, the other by a transfer of the corporate stock within 25 days. For reasons not disclosed by the record, the sellers transferred the stock of Olean. That corporation then made a formal transfer of its properties to Prairie, and on the same day dissolved. The question in that case was not the amount of gain or loss upon the liquidation of Olean, but was whether Prairie was entitled to depletion deductions based upon the amount it had paid out. The court held that it was entitled to such depletion deductions. In deciding that there was no reorganization to deprive Prairie of this basis, the court said that the acquisition of the properties by Prairie should be treated as an entire transaction, citing . There are substantial reasons in the present case why the separate transactions should not be disregarded for tax purpose and why the whole chain of events should not be regarded as a single*910 transaction entered into for the purpose of acquiring certain properties of Union. Cf. , et seq.; . Although courts have a tendency at times to "look through form to substance", they nevertheless have laid down the rule that tax liability must be determined by considering what the taxpayer did, not what it intended to do, or what it might have done. ; ; ; . Combs was originally authorized to negotiate for the purchase of either the assets or the stock of Union, but the contract which he actually entered into was with the stockholders of Union and provided for the purchase of the stock. The Union corporation, the owner of the assets, was not a party to and had nothing to do with the negotiations. It neither sold nor received anything. Cf. *911 ; ; . The parties to this proceeding are agreed that the petitioner became the owner of the stock of Union on February 2, 1925. Dissolution of Union was not contemplated at that time. It was to continue for some indefinite *786 time, at least until the amounts called for under the contract were paid from its earnings. Thereafter it was to mortgage its properties and deliver its notes to its old stockholders. It actually continued to hold and operate its properties for almost a year after February 2, 1925, and at the end of that time mortgaged its properties. In the meantime, the petitioner, as sole stockholder, received all dividends and benefits from the earnings of the corporation. If the petitioner was not the owner of the stock during that period, then it was not entitled to the dividends amounting to more than a million dollars which were declared during that period and transferred to the sellers of the Union stock and, consequently, that million dollars could not be a part of the cost of the stock*912 to the petitioner. Union was a separate taxpayer during all of 1925 and joined with the petitioner in a consolidated return for a part of that year because the petitioner was the owner of all of its stock. After the petitioner had paid for the stock in full, it dissolved Union and for the first time took over the properties. The facts in the present case serve to distinguish it from the Prairie and Warner cases cited by the petitioner on this point. It is more like . The petitioner purchased the stock of Union and acquired the assets in the dissolution of Union. Those facts can not be disregarded for tax purposes. The distribution in liquidation was a taxable transaction. Cf. ; ; affd., ; . The petitioner's next argument is that the cost of the Union stock was equal to the amount received in liquidation of Union and, therefore, it had no profit from these transactions, even if its purchase of the stock and the liquidation of Union may not*913 be disregarded for tax purposes. The parties have stipulated that the value of the Union stock on February 2, 1925, was $7,906,043.32. The petitioner states that it acquired assets worth $9,656,043.32 (Union stock and $1,750,000 in cash) and paid therefor $5,000,000 under the contract and $4,000,000 par value of its notes and stock to Pynchon & Co. 2 It therefore argues that "$2,000,000 par value of the Swiss Oil Stock must be regarded as having been issued for $2,906,043.32 value of Union Gas & Oil Company stock" and the total cost of the Union stock to it was $7,906,043.32. There are several different reasons why this argument is unsound. It is based, in part at least, upon the false premise that the cost of property obtained by the issuance of stock is the value of the property obtained, rather than the value of the stock paid for it. Where a corporation acquires property by issuing its stock for the property, the cost of the property is the fair market value of the stock. The *787 important thing is to determine the value of the stock paid for the*914 property. ; affd., . Where a corporation having no assets and no liabilities issues all of its stock for property and there is no better way of determining the value of the stock, that value is sometimes determined by assuming that the total value of the stock is the equivalent of the total value of the property back of it. ; ; (part V); ; ; ; ; ; ; ; . Cf. ; *915 ; . Under such circumstances the value of the property purchased is taken as evidence of the value of the stock paid for it. But where a corporation, having assets, liabilities, and outstanding stock, issues some new stock in exchange for some property, the situation is very different and there is much less reason to apply the above rule. The sellers of the Union stock received only $5,000,000 for their stock. If the cost of the stock to the petitioner exceeded that amount, the additional cost must result from the payments to Pynchon & Co. The petitioner is contending that it acquired the contract for purchase of the Union stock from Pynchon & Co., together with $1,750,000 in cash, for which it paid Pynchon & Co. $4,906,043.32, represented by $2,000,000 par value of its notes and $2,000,000 par value of its common stock. Ordinarily the cost of property purchased with cash is the amount of cash paid for it. Although the cost of a contract to purchase may form a part of the cost of the property purchased under that*916 contract, still the cost of obtaining cash can not be added to the cost of property purchased with the cash in a separate transaction. Therefore, it becomes important to determine, first, whether or not the petitioner obtained the contract to purchase the Union stock from Pynchon & Co., and, if it did, second, to determine how much it paid Pynchon & Co. for that contract. The Commissioner is contending that the petitioner did not acquire the contract to purchase the Union stock from Pynchon & Co. under the agreement of January 26, 1925, because the contract of July 29, 1924, had never been assigned to Pynchon & Co. but still belonged to the petitioner on January 26, 1925. There is evidence tending to support this contention of the Commissioner, yet the *788 record as a whole does not justify a definite finding of fact that the contract was not transferred from Pynchon & Co. to the petitioner. On the other hand, it does not justify a finding that it was so transferred. The consequences, if any, of this uncertainty must be suffered by the Commissioner, who has the burden of proof on this issue. However, the point is immaterial for the record shows that even if the contract*917 was transferred by Pynchon & Co. to the petitioner, the petitioner paid nothing for it. The fact that the petitioner paid nothing for the contract to purchase the Union stock is demonstrated by a "before and after" comparison. Prior to the transaction with Pynchon & Co. the petitioner was the owner of an option to purchase the Union stock, it needed cash with which to purchase the Union stock, and it had the inherent power to issue its notes and stock. Pynchon & Co., at that time, had $1,750,000 but had no desire to acquire the option for itself. After the transaction, the petitioner had a right to purchase the Union stock under the contract of July 29, 1924, just as it had prior to that transaction. It had obtained $1,750,000 in cash and had parted with $2,000,000 par value of its notes and $2,000,000 par value of its stock. Pynchon & Co. had parted with $1,750,000 in cash, and had obtained $2,000,000 par value of the petitioner's notes and $2,000,000 par value of the petitioner's stock. The fact that the petitioner paid nothing for the contract is also demonstrated by consideration of the motives and acts of the parties. *918 After Martin had stated that his company might be willing to furnish $1,750,000 in cash in exchange for $2,000,000 par value of the petitioner's notes and $2,000,000 par value of the petitioner's common stock, the general counsel of the petitioner suggested for the first time the plan of having the option exercised on behalf of Pynchon & Co. and then having the latter transfer the contract to purchase the stock to the petitioner, together with the cash. His thought was that in this way it might appear that the petitioner had received something of value over and above the $1,750,000 in cash for its notes and stock and there would be no violation of the laws of Kentucky. The Circuit Court of Appeals for the Sixth Circuit was of the opinion that the transfer over and back was an unnecessary gesture which added nothing to the validity of the stock issuance. . 3 It certainly had no effect upon the real consideration passing *789 between the parties. The petitioner had a valuable option on which it had paid $75,000. Pynchon & Co. never paid the petitioner anything for the option and was not to acquire any*919 valuable rights under the contract of July 29, 1924. The parties at all times intended that only the petitioner should benefit from the contract and only the petitioner should purchase the Union stock. Cf. . If the contract of July 29, 1924, ever passed to Pynchon & Co., it passed without consideration and subject to an obligation to return it immediately with $1,750,000 in cash so that the petitioner could complete the initial payment. If the contract to purchase passed back to the petitioner, it likewise passed without consideration and in accordance with a prearranged plan. Those transfers were not intended to have and did not have any effect upon the amount of cash or consideration which Pynchon & Co. was to furnish the petitioner nor upon the amount of securities which the petitioner was to issue to Pynchon & Co. Thus in no true sense was a transfer of the contract to purchase the Union stock a part of the consideration moving from Pynchon & Co. to the petitioner for the issuance by the petitioner of its notes and stock and no part of the consideration paid by the petitioner was paid for a transfer of the contract to purchase*920 the Union stock. The fact that the petitioner paid nothing for the contract is also shown in another way. Assume that the contract passed to the petitioner from Pynchon & Co. in the same transaction in which the petitioner obtained $1,750,000 in cash from Pynchon & Co. The cost of the property thus obtained was paid in the petitioner's notes and stock, and was measured by the fair market value of those securities. Clearly $1,750,000 in cash should cost $1,750,000. Any additional cost attributable to the cost of the contract would have to be based upon an excess of the fair market value of the securities over*921 $1,750,000. The petitioner, reasoning in this way, contends that the notes were worth par, the stock was worth $2,906,043.32, and the excess of their total value over the amount of cash obtained represents cost of the contract. The evidence in the case shows, however, that the total fair market value of the $2,000,000 par value of notes and $2,000,000 par value of stock issued to Pynchon & Co. was not more than $1,750,000 at the time of issuance. The finding of fact that the fair market value of the notes and stock issued to Pynchon & Co. was $1,750,000 at the time of issuance is fatal to the petitioner's contention that the cost of the Union stock was more than $5,000,000. The $2,000,000 par value of common stock not only was not worth $2,906,043.32, but in fact was worth only a small percentage of its par value at that time. The principal value of the securities issued to Pynchon & Co. was in the bonds. Yet they were not worth par *790 even when an equal amount of the par value of the stock accompanied them as a bonus. If the petitioner had obtained the $1,750,000 in cash by selling its securities to the public at fair market value, nothing would have been added thereby*922 to the cost of the Union stock. Consequently it is not surprising that the effect of the sale of these securities to a banker was no different. Thus on no theory that has been suggested could the transaction which the petitioner had with Pynchon & Co. have had any effect upon the cost of the Union stock to the petitioner. Another argument advanced by the petitioner is that the Commissioner is now estopped to deny that the stock and bonds issued to Pynchon & Co. were a part of the cost of acquiring the stock of Union. Its reason is that the Commissioner did not allow the petitioner a deduction for amortization of the discount on the notes for the year 1925, but stated at that time that the stock and the alleged discount should be capitalized as a part of the cost of the Union stock. An estoppel must be pleaded and proven by the party relying upon it. It is based upon the misrepresentation or concealment of some material fact. The effect of an estoppel is that the fact is conclusively presumed to be as the innocent party believed it to be. *923 . The facts in this case do not establish any estoppel. The petitioner had full knowledge of the facts of its own case in 1925. If it failed to have its tax liability for 1925 correctly determined, that is not a sufficient reason for having the 1925 error corrected by an erroneous determination of its tax liability for some later year or years. Cf. ; ; affd., ; certiorari denied, ; . The petitioner also argues that there is no proof that a profit of $2,906,043.32 from the liquidation of Union has not been included in its income in the determination of the deficiency, and, further, that the prayer in the amended answer does not assert a claim for an increased deficiency as contemplated by the statute. These two arguments are mentioned merely for the purpose of indicating that they have not been overlooked. They are refuted by the facts in the case. The only suggestion of a reason why the petitioner would*924 not be entitled to have its deductions for depletion computed upon the stipulated value of the properties at the time it received them in the liquidation of Union, comes from its own contention that in reality it bought the assets of Union. If it did buy them, it paid no more than $5,000,000 for them and would not be entitled to depletion deductions based upon any larger figure. However, the contention that it purchased the assets of Union has been rejected, and since it has been taxed with a profit represented by the excess of the value of the properties *791 over the cost of the stock, it is entitled to depletion deductions for the years 1926 to 1930, inclusive, computed upon the basis of the stipulated value of the depletable properties on the date they were received by it in the liquidation of Union. The Commissioner concedes the correctness of this holding, provided he is sustained upon the issue which he raised. Decision will be entered under Rule 50. Footnotes 1. The $2,500,000 of notes which Union issued was no part of the cost of the Union stock to the petitioner, but this fact is immaterial here since the Commissioner concedes that the cost was $5,000,000 and since the petitioner assumed payment of the notes and eventually paid them. ↩ 2. The "cost", according to the petitioner's figures, was $250,000 more than the value of the assets received. ↩ 3. In that case the court affirmed the decision of the lower court dismissing a bill in equity by one of the old stockholders of the petitioner for cancellation of the notes and stock issued to Pynchon & Co. The court held that the transaction with Pynchon & Co. was for the best interests of the petitioner and its stockholders because the petitioner was thereby permitted to buy the valuable Union stock at a bargain price and the stockholders were benefitted rather than wronged. The question there before the court was a very different one from the question here. ↩