GAIN OR LOSS-Continued. I. REALIZATION OF GAIN OR LOSS. (1) Nature of Transaction. 1. Separate Transactions; Sale and Purchase, or Exchange. Stockholder and owner of bonds of corporation voluntarily subscribed to preferred stock issued to enable corporation to retire its bonds and gave check in payment of subscription which was not to be presented until he had sold his bonds for cash, and thereafter he received cash for his bonds. Held, transaction was not an exchange of bonds for preferred stock and that sale of bonds and stock subscription were separate transactions. George Theis, Jr.----2. Contract of Sale or Agency. Contract for sale of land under which vendor retained legal title as security for purchase price and vendee, in lieu of making initial payment, agreed to improve and subdivide land at its own expense and sell lots, and to pay vendor annually a specified percentage of proceeds of sales until entire purchase price had been paid, and vendor agreed, upon final payment, to convey to vendee legal title to lots remaining unsold, held a contract for sale of land though in form a contract creating relationship of principal and agent. Arthur B. Grover... 3. Debts; Composition Agreement with Creditors. Saving enuring to taxpayer from release, under composition agreement with creditors, of obligation to pay a portion of debts, held not to constitute taxable income. Meyer Jewelry Co.. 4. Forfeitures; Contracts; Sale of Bonds. Where bonds were purchased on installment basis, title being retained by the vendor and no sale being contemplated until payment of final installment, payments forfeited to vendor under contracts are income and market value of bonds at time of forfeiture is immaterial. First National Bank of Manchester _ _ _ 5. Id. Sale of Real Estate. Where real estate is sold for part cash and balance of purchase price is secured by mortgage, and purchaser in same year turns property back to vendor, cash payment constitutes taxable income of vendor. Laurens Trust Co... 6. Leases; Oil and Gas. Lease for 5 years and as much longer as oil or gas is produced in paying quantities, reserving to lessor a portion of oil or gas produced and providing for payment of rental when drilling is delayed, construed and held to vest in lessee mere right of exploration and production and not to convey oil and gas in place. Nelson Land & Oil Co. 7. Id. Bonus paid to grantor of such lease is not a return of capital any more than are royalties paid thereunder, and is taxable income of grantor. Id. 8. Loan or Investment. Assignment to stockholders by corporation of contract for purchase of oil leases, which provided for payment partly in cash and partly in oil, in consideration of advances in proportion to stock holdings of cash necessary to make initial payment under contract, and subsequent transfer of leases, after original purchase price had been paid, in exchange for stock of par value equal to twice amount of advances, held not a loan to corporation but an investment by stockholders upon which they realized gain to extent of difference between advances and fair market value of stock on date of transfer and receipt. V. J. Bulleit__. 9. Sale of Dilapidated Building. Difference between assessed value for local tax purposes and sale price of building held not deductible as a loss, where building was uninhabitable and its removal increased value of land. Simon England _ _ _ (2) Title. 10. Equitable Interest; Contracts and Real Estate. Contract for sale of land for specified price payable out of proceeds of sales of lots over period of years, title to which was reserved in vendor until final payment had been made, held to have vested in vendor an equitable interest in lots remaining unsold and in contracts for sale thereof. Arthur B. Grover... Page 1030 508 1319 751 331 315 631 1069 508 11. Corporations and Stockholders; Dissolution Pending Sale. Corporation was dissolved pending negotiations for sale of its property and property was transferred to stockholders who thereafter consummated sale. Held, corporation realized no profit and profit, if any, enured to stockholders. Robert Jemison, Jr... 780 12. Id. Fact that corporation avoided tax liability by procedure taken is no justification, in absence of fraud, for holding that dissolution effected distribution of proceeds of sale rather than of property. Id. GAIN OR LOSS-Continued. 13. Estate or Beneficiary. Profit upon sale of property of estate of taxpayer's deceased husband held not to have been realized by her in her individual capacity, upon finding that it was included in her account as administratrix as receipts of estate and that records of probate court showed sale to have been made for benefit of estate. Lena Speizer-_ 14. Husband and Wife; Joint and Separate Funds. Property was purchased in part with separate funds of wife and in part with funds derived from business conducted jointly by husband and wife, and title was taken in wife's name. Held, profit on sale was not income to husband. Henry Grimmer... 15. Id. Transfer to Avoid Tax. Where surrounding circumstances and subsequent transactions indicate that gift or sale between husband and wife is a mere subterfuge to avoid tax liability, transaction will be held invalid. Robert Jemison, Jr.-- 16. Real Estate. Finding made that real estate was not owned by taxpayer and gain upon sale held not taxable income to her. Jane B. Coates___. 17. Stock; Gift of Stock or of Proceeds of Sale; Bona Fides. Transfer of stock by taxpayer, effected by issuance and delivery of new certificates, held a bona fide gift; fact that transfer was made shortly before and in anticipation of sale of stock at profit, for purpose of avoiding tax, is no ground for holding transaction to be a gift of proceeds of sale, where gift was made prior to agreement to sell. Harry C. Moores_ _ _ _ 18. Id. Where, prior to negotiations for sale, stockholder made absolute gift of stock accompanied by bill of sale and delivery, and shortly thereafter stock was sold by donees, held, there was a bona fide gift of stock and not of proceeds of sale, and donor was not taxable on proceeds of sale. John W. Bailey 19. Id. Husband and Wife. Unconditional transfer of stock by husband to wife, accompanied by endorsement and delivery of certificates and separate instrument of assignment, held a bona fide gift of stock and not a gift of proceeds of subsequent sale of stock by wife. Frederick H. Hoffman Martin Zinn___. 20. Id. Upon findings that certificate for stock purchased was issued in name of husband, that husband, pursuant to promise previously made, immediately delivered it to his wife, that wife consented to sale of stock, that husband assigned certificate to his wife prior to sale, and that proceeds were deposited to credit of wife and subsequently withdrawn by husband in purchasing other securities in wife's name, held, that husband realized taxable income to extent of difference between purchase and sale price of stock. Walter Neustadt___ 21. Id. Husband made bona fide gift of stock to his wife and corporation thereafter dissolved and conveyed its real estate to stockholders, who thereafter sold it. Held, not a gift of proceeds of sale, since, at time of gift, there had been no sale, and, in addition, subject of gift was stock while subject of sale was real estate. Robert Jemison, Jr.. 22. Id. Board being unable to find that stock so transferred to wife had a value substantially different from value of real estate received by her as stockholder after dissolution, held, no taxable gain was realized. Id. 23. Id. Sale as Agent. Stock standing on corporation's books in name of another held not to have belonged to taxpayer but to have been sold by him as agent of such other person. H. J. Kelly..- (3) Time of Realization. 24. Closed Transactions; Actual Loss. Losses from dealings in property are deductible only when ascertained and determined upon an actual, completed, and closed transaction, and are not sustained through mental processes by which taxpayer determines that property is worthless and charges it off on books while he still retains title thereto. A. J. Schwarzler Co. Page 413 313 780 429 301 362 964 969 974 491 780 257 535 GAIN OR LOSS-Continued. 25. Id. Acceptance of Property Sold. Taxpayer contracted to sell machinery and to deliver and install it on premises of purchaser, the contract containing provisions for a test and acceptance after installation; machinery was installed in one year and test and acceptance took place in following year. Held, sale was contingent upon acceptance and profit was realized in year in which acceptance took place. Webb Press Co... 26. Id. Installment Sales; Partnership Interest. Sale held not an installment sale, within secs. 212 (d) and 1208, Act 1926, where initial payment exceeded 25% of purchase price. Anton M. Meyer... 27. Id. Stock. Sale held not an installment sale, within secs. 212 (d) and 1208, Act 1926, where payments received during taxable year in which sale was made exceeded 25% of purchase price. George Antonoplos -- 28. Id. Initial cash payment received upon sale of stock held not to constitute one-fourth of purchase price, where part of cash payment was received by taxpayer as initial payment on stock of another included in sale by taxpayer, acting as agent of such other person in sale of his stock; held, further, that sale was an installment sale. H. J. Kelly............ (4) Exchange. 29. Equivalent of Cash; Notes. Where cash and notes are received as consideration for sale and there is no evidence that notes were not worth face value or that there was no market for them, notes treated as equivalent of cash and transaction is a closed transaction in year in which cash and notes were received. H. J. Kelly- 30. Id. Sale for part cash and part notes held a sale for cash or its equivalent, where purchaser was financially responsible, notes were worth face value and vendor retained title as security for payment. Hoskins Lumber Co.---- J. S. 31. Id. Fair market value of second trust note.received upon sale of real estate held to have been 70% of face value. David Feldman___ 32. Id. Notes received in part payment of purchase price of land and secured by mortgage held to have been worth face value at time of receipt, where land was ample security for notes, maker promptly met payments on notes, and taxpayer accepted, at face value in satisfaction of debt, similar notes held by co-vendor. Sallie M. Wortham--- 33. Id. Neither fact that notes given in payment for property were secured by mortgage or lien, nor fact that bank refused to discount them because it could not discount such notes in excess of certain percentage of capital stock, is sufficient to establish that notes had no fair market value. M. E. Gettys_ 34. Id. Value of non-interest-bearing note received in part payment for stock sold determined on basis of par value of shares of such stock pledged as security for note, where stock pledged was not worth more than par and payee was unable to discount note or obtain loans upon it. George Antonoplos. 35. Id. Where interest in partnership is sold for cash and notes, and notes have no readily realizable market value, cash should be used to reduce the basis, and no taxable income arises until capital is recovered. Anton M. Meyer-- 36. Id. Stock in corporation received in exchange for interest in partnership transferred to corporation treated as equivalent of cash to extent of par value. Louis Abrams... 37. Bonds Exchanged for Stock. Difference between cost of bonds and par value of stock received in exchange therefor, which was based on market value (lower than cost) of bonds at time of exchange, held deductible as a loss. Charles T. Plunkett _ _ . Page 247 1329 1236 257 257 846 434 1307 441 1236 1329 385 1265 Where there is no evidence of market 38. Stock Exchanged for Property. value of stock issued for property, stock deemed to be equivalent in value to property for which it was exchanged. Id. 39. Id. Finding made as to value of stock in year in which received in exchange. George W. Baumhoff... 392 40. Id. Sales. Value of stock at date of receipt in exchange for other property determined on basis of price realized on sales of a large number of shares of like stock. V. J. Bulleit _ . 41. Id. Reorganization; Evidence of Market Value. Difference between face value of bonds and par value of stock received in exchange upon reorganization, held not deductible as loss in absence of evidence of market value of stock. E. J. Barklow. 631 685 GAIN OR LOSS-Continued. 42. Id. Insolvent Business. Entire stock of corporation was received by taxpayer in exchange for his business, the liabilities of which, at time of exchange, exceeded assets. Held, stock did not have any fair market value and taxpayer realized no gain from transaction. Constantine J. Tsivoglou 43. Id. Book Value of Assets; Appreciation. Fair market value of stock received in exchange for assets determined on basis of depreciated cost of assets as shown by books, after eliminating appreciation based on valuation by accountants made after exchange and having no reference to fair market value of assets. Wallis Tractor Co.. 44. Stock Exchanged for Stock. Sales; Opinion of Purchaser. In absence of evidence of sales or financial condition of corporation, value of stock at time of acquisition in exchange for other stock determined on basis of price for which it was sold one year after acquisition and of opinion of purchaser that value at time of exchange was no greater than when he purchased it. Nellie Kenefick_ - 45. Id. Merger; Sales to Brokers. Price paid by brokers for stock of new corporation formed by merger of two taxpayer corporations, under agreement that taxpayer corporations should hold preferred stock not purchased for 6 months until brokers had disposed of stock purchased and should hold common stock not purchased for 2 years, held not a proper measure of market value of stock of new corporation. Wallis Tractor Co. 46. Id. Sales on Stock Exchange during year following transfer of stock to corporation for assets held not a proper measure of market value, where prices were controlled by syndicate which floated stock and immediately after dissolution of syndicate price declined and there were practically no sales of the stock on the exchange. Id. 47. Id. Sale of Stock Acquired in Exchange. When stock is sold in one year at price equal to fair market value in preceding year when stock was acquired in exchange for other stock, no loss is sustained in year of sale. Nellie Kenefick...... II. BASIS FOR DETERMINING GAIN OR LOSS. (1) Valuation. 1. Market Value. Definition. Wallis Tractor Co. 2. Good Will; Sale of Tangibles after Acquisition of Business. Taxpayer held not to have sustained loss or diminution in value of good will of business acquired for stock, where plant, consisting of land, buildings, leasehold, and other tangibles, was sold after acquisition of business and good will was attached not to tangibles and location of plant but to name of predecessor which was included in taxpayer's corporate name and retained after sale of plant. Acme, Palmers & De Mooy Foundry Co__. 3. Real Estate; Inheritance. Finding made as to value of real estate at time of inheritance by taxpayer. R. B. Cook__ _ 4. Stock; Assets and Earnings. Where stock is closely held and there is no evidence of sales, fair market value determined upon consideration of value of assets of corporation and earnings over period of years. W. C. Arthurs. 5. Id. Book Value. In valuing stock which is closely held, book value must serve as a basis if result is to be anything more than a dignified guess. Grant Trust & Savings Co.. 6. Id. Capitalization of Good Will. Where stock was closely held and there were no sales in open market and no good-will value was carried on books, value determined on basis of book value, plus proportional value arrived at by capitalization of good will. Id. 7. Id. Where corporation was in existence 42 years, dividends paid were small, and earnings had decreased in last 2 years, value of good will computed on basis of 8% return on average net tangibles and application of 3-year purchase to average net earnings attributable to intangibles. (2) Cost or 1913 Value. Id.. 8. Separate Transactions. Where stockholder in liquidation receives pro rata share of bonds comprising assets of corporation and thereafter sells them, there are two separate transactions, and cost of bonds, for determining gain upon their sale, is to be measured not by price originally paid for stock but by market value of bonds at date of liquidation. George Theis, Jr. Page 743 981 659 981 659 981 1126 668 374 1026 1030 GAIN OR LOSS-Continued. 9. Basis. Royalties reserved by lessor of oil lands are "property” within sec. 202, Act 1921, and gain or loss upon sale determined on basis of cost or Mar. 1, 1913, value if acquired before that date. Anna Taylor--10. Id. Discovery Value. Sec. 214 (a) (10), Act 1921, allowing deductions for depletion of oil land on basis of discovery value, except in so far as such deduction reduces basis, is not applicable in determining gain or loss from sale. Id. 11. Id. Property Without 1913 Value. Where taxpayer owned land in fee and there had been no discovery, and right to drill for oil had no value in 1913, entire consideration received upon subsequent sale of right to receive royalties held taxable gain. Id. 12. Id. Gains; Cost. Under sec. 202 (a) (2), Act 1918, basis for ascertaining gain from sale of property acquired after 1913 is cost and not value at date of acquisition. Mattie Cowell..._ 13. Id. Stock. Where, during pendency of negotiations for sale of its property, corporation was dissolved and property was transferred in kind to stockholders who thereafter consummated sale, held, that profit enured to stockholders and, dissolution and sale being made at approximately same time, basis for determining gain was difference between cost of stock to stockholders and amount of proceeds received by them. Robert Jemison, Jr. - 14. Id. 1913 Value; Life Insurance. Gain derived from settlement at maturity under policy which was paid up on Mar. 1, 1913, determined on basis of cash surrender value on Mar. 1, 1913, where such value was less than total premiums paid. Henry S. Kline.. 15. Id. Losses. Provision of sec. 202, Act 1918, that basis in ascertaining loss upon sale of property acquired before 1913 shall be market price or value at that date, is a limitation on actual loss that otherwise would be deductible, and, where property had no market value on that date, no loss can be allowed. W. C. Arthurs _ _ 16. Id. Stock. Loss upon stock purchased before and sold after 1913 computed on basis of cost or 1913 value, whichever is lower. George W. Todd 17. Id. Exchange; Stock Acquired for Assets. Two taxpayer corporations exchanged their assets, without liabilities, for stock of new corporation organized in different State; assets of new corporation were different from those of taxpayer corporations, separately considered, and liabilities of stockholders also were different. Held, taxpayer corporations realized profit or loss in year of exchange measured by difference between depreciated cost or fair market value at Mar. 1, 1913, if greater, of assets transferred to new corporation and fair market value, if any, of stock received by them. Wallis Tractor Co-- 18. Id. Subsequent Sale of Stock. Where part of stock received in such exchange was subsequently sold for cash, profit measured by difference between fair market value of stock at date of receipt and amount of cash received from sale. Id. 19. Evidence of Cost; Bonds. Finding made as to cost of bonds purchased and sold after 1913, for purposes of determining gain. George W. Todd.. 20. Id. Where corporation, in lieu of distributing earnings through dividends, sold its bonds to stockholders at less than market value, difference between sale price and market price included in cost of bonds to stockholders. George Theis, Jr... 21. Id. Interest in Partnership; Reduction by Losses. Losses of partnership reduce each partner's investment, and, in computing gain or loss upon sale by partner of his interest, cost of interest should be reduced by his pro rata share of losses. Anton M. Meyer.. 22. Id. Property Acquired for Stock. Commissioner's determination of gain derived from sale of property acquired for stock not disturbed in absence of evidence of actual value of stock. J. H. McDermott Oil Co... 23. Id. Real Estate. Commissioner's determination of gain derived from sale approved for failure to produce evidence of cost. Laurens Trust Co... 24. Id. Finding made as to cost of real estate sold. George W. Baumhoff.... Page 1201 432 780 1138 374 327 981 327 1030 1329 689 331 392 25. Id. Stock. Finding made as to cost of stock sold. George W. Todd 327 |