1932 BTA LEXIS 1158 | B.T.A. | 1932
Lead Opinion
The parties all agree that the exchanges in 1920 and 1923 were in connection with reorganizations of the corporation, and no gain or loss should be deemed to have occurred or should be-recognized. See sections 202 (b) and 202 (c) (2) of the Revenue-Acts of 1918 and 1921, respectively. Section 202 (e) of the latter act does not apply in this case, since the preferred stock was received in, a nontaxable exchange and the subsequent sale was a separate transaction. The stock received in such exchanges must be treated as taking the place of that given for the purpose of computing subsequent gain- or loss from the disposition of it. Section 202 (d)- (1) of. the Revenue Act of 1921. See also section 202 (b) of the-Revenue Act of 1918. This means that the new stock takes the basis of the old. Matthias W. Wildschutz, 22 B. T. A. 1140; aff'd., 60 Fed. (2d) 689. Where only one kind of stock is received in the exchange, the application of this rule is simple enough and the act' needs no elaboration. But here two classes of securities were received and the question is, How is subsequent gain or loss upon the disposition of these new shares to be computed? The act is not specific on this detail and the Commissioner, as he was authorized to do, has taken care of it in his regulations. Article 1567 of Regulations 62 deals directly with section 202 (d) (1) and the problem presented above, as follows:
If property is exchanged for two hinds of property and no gain or loss is recognized * * * the cost of the original, property should be apportioned, if possible, between the two hinds of property received in exchange for the purpose-of determining gain or loss upon subsequent sale. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until out of the proceeds of sale shall have been recovered the entire cost'of the original property. When securities of a single class are exchanged for new securities of different classes so that no gain or loss is realized * * * , for the purpose of determining gain or loss on the subsequent sale of any of the new securities the proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the marhet value of the particular class bears to the marhet value of all securities received on the date of the exchange.
The petitioners apparently approve of the regulation, but they claim that the Commissioner has incorrectly applied' it to the facts in these cases. They agree that the preferred stock at the date of the exchange in which they received it had a market value of $100 per share. But they contend that the common stock had no market value or that its market value could not be determined; that no apportionment of the old basis was practicable or possible; and that therefore no profit on the subsequent sales will be realized by any of them until that one has recovered his entire old basis. The Commissioner, except in the case of Falck, has computed a value for the common stock and has allocated the original bases accordingly in a manner which he claims is practicable and fair. Here we find the principal difference between the petitioners and the Commissioner.
The petitioners are beside the point in their argument that the common stock had no “ readily realizable market value.” Neither the act nor the regulation here involved requires that the market value should be readily realizable. The term “ readily realizable market value ” has been used in the revenue acts where the recipient of property in an exchange is to be taxed on the gain resulting from the exchange. 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. In the present case value is not being used to take the place of cash as if it were the purchase price, itself giving rise to gain, but is being used only as a practical means of apportioning a basis to be subtracted from the purchase price in case the property is subsequently sold. The petitioners incorrectly assume that a strict interpretation of section 202 (d) (1) and the regulations would be favorable to taxpayers and therefore should be adopted under the rule that ambiguities or doubts in a taxing statute must be resolved against the government responsible for the wording used. They lose sight of the fact that it is impossible to determine what construction would be most favorable to taxpayers generally. Cf. Brewster v. Gaffe, 280 U. S. 327. The apportionment applies also to benefit taxpayers claiming losses. Other taxpayers may want to report their gains ratably as they dispose of their stock instead of lumping- them, as these petitioners would prefer to do. In fact, these very taxpayers in the end may be benefited by this apportionment if they should sell the rest of their stock in a high tax year.
The various deficiency notices were introduced in evidence to show how the Commissioner arrived at the deficiencies. These show that
If the Falck case had been heard separately, the failure of proof would be more apparent, but it is no less real because the cases were consolidated for hearing. Testimony and other evidence introduced at this hearing has general application, but the Commissioner is not aided in his case against Falck by evidence of how he computed the deficiencies against the other petitioners. The Commissioner introduced no evidence, but relied chiefly upon the presumptive correctness of his determinations. In the Falck case this was fatal to his affirmative contention.
The Commissioner does not ask us to rely blindly upon his determinations in the remaining cases. He has disclosed his method of valuation, a consideration of the value of the assets back of the stock. Cf. Wright et al., 19 B. T. A. 541; George F. Milton, 17 B. T. A. 380; George A. Richer, 10 B. T. A. 11. In order to determine the value of the intangible assets, he used a formula frequently relied upon for such purpose where there are no sales, i. e., he reduced the average earnings for five years preceding December, 1923, by 8 per cent of the average tangibles for the period and capitalized the remaining earnings at 15 per cent to arrive at the value of intangibles. This is the formula set forth in A. B. M. 34, C. B. 2, p. 31, used in the absence of better evidence or as a check in Dwight & Lloyd Sintering Co., 1 B. T. A. 179; Otis Steel Co., 6 B. T. A. 358; Schilling Grain Co., 8 B. T. A. 1048. See also Estate of Jacob Fish, 1 B. T. A. 882; Robertson v. Routzahn, 1 Fed. Supp. 355. This value of intangibles he added to the value of tangibles as of December,
The fact that the presumptive correctness of the Commissioner’s determinations places the burden of proof upon petitioners in proceedings before this Board, so often relied upon by the Commissioner, as here, frequently makes the decision of cases difficult and unsatisfactory, where the introduction of evidence would have simplified matters. This burden-of-proof principle should not be pressed unduly to defeat taxpayers. Mount v. Commissioner, 48 Fed. (2d) 550. Yet it has its place and requires that the evidence, when fairly considered, preponderate in favor of the petitioners. Wichwire v. Reinecke, 275 U. S. 101; Crook v. United States, 30 Fed. (2d) 917; Walls v. Commissioner, 60 Fed. (2d) 347; Avery v. Commissioner, 22 Fed. (2d) 6; Wright et al., supra; aff'd., 50 Fed. (2d) 727; certiorari denied, 284 U. S. 652. In Burnet v. Houston, 283 U. S. 223, the court said petitioners are required “ to produce the best available evidence of value which the circumstances and nature of the transaction permitted.”
What have the petitioners produced as the best available evidence which the circumstances and nature of the transaction permitted? The respondent concedes that the common stock has been closely held and has never been sold or offered for sale to the public; also, that the sales to employees do not indicate a fair or reasonable market value. Such facts are material, but alone are not determinative as to whether the stock had a market value. Insurance & Title Guarantee Co., 12 B. T. A. 452; aff'd., 36 Fed. (2d) 842; certiorari denied, 281 U. S. 748; Chicago Ry. Equipment Co. v. Blair, 20 Fed. (2d) 10, 14; Wright et al., supra. For additional proof of their
He said be never learned what the stock was reasonably worth. This value was unknown to him, but was it unknowable to one willing to make a reasonable effort to discover it ?
We do not know the relationship of the various stockholders of the n ame Houghton. But about 86 per cent of the stock of the Corning Glass Works was owned by them. Under such circumstances, the failure of the trustee to sell may have been due to other reasons than lack of a real market. None of the stockholders or officials of the company were called as witnesses to give information which they might have about the value of the stock. None of the petitioners testified. No experts on valuation appeared to- aid the petitioners or the Board. Perhaps the absence of some such possible witnesses was justified, but, before we should say that the stock had no market value and hold that the Commissioner’s apportionment was,- not practicable, some more convincing- evidence should- be produced. We can not assume that an effort to produce better evidence would have, been fruitless. None of the other stockholders were offering" to-, dispose of their stock. Were they willing and able to buy more.? What, would they have given, for more? How would they have determined, the proper amount to offer and how would the trustee: have determined the proper price to accept except by the aid of some, such method as the Commissioner has used? If this method was faulty or inferior, why was this not shown to us in some way ? We think we are not giving undue importance to the burden of proof nor are we unmindful of the difficulty of proving a negative in holding that these petitioners have failed to produce sufficient evidence to- weigh the scales in their favor.
Reviewed by the Board.
Judgment will be entered under Bule 50.
Dissenting Opinion
dissenting: Except as to Docket No. 20452, I dissent from the majority opinion. I agree that whether the common stock had a “ readily realizable market value ” has nothing to do with the case. I agree also that section 202 (d) (1) is controlling here, that the new stocks received take the basis of the old stock for which exchanged, and that article 1567 of Regulations 62, having been approved as reasonable, should be applied in determining gain or loss upon subsequent sale of the stocks, or a part thereof, so acquired. The article requires that a “ fair apportionment ” of cost basis be allocated to each class of securities in “ that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange.” The respondent has made an apportionment which is upheld by the prevailing opinion on the ground that petitioners have failed to overcome the presumptive correctness with which his determinations are armored — have failed to prove that the common stock had a market value different from that assigned to it by respondent. At this point I disagree. The evidence in this record is sufficient to convince me that the common stock had no market value, or if it had, that the value was not known, and that showing, in my opinion, is sufficient to overcome the presumptive correctness of respondent’s determination of market value upon which he bases his apportionment. The stock undoubtedly was valuable and conceivably might have been sold at some price, but as to what that price would be, and whether it would be market value, we can only guess. Its book value and perhaps its intrinsic value might be determined quite accurately, but such values are not
I realize that upon occasion, because of statutory requirements, a value, such as a fair market value as of March 1, 1913, or as of the date of death of a decedent must be determined, and that such determination, be it accurate or inaccurate, if reasonably bottomed upon fact, must be used as a basis for the computation of statutory tax liabilities. No such necessity confronts us here. We are seeking only to determine whether this common stock had a market value, so that it is possible or practicable to make an apportionment of a cost basis between it and a preferred stock of known market value. My conclusion is that its market value at the time received upon exchange was unknown and I see no necessity to attempt to fix that value) by guess or to attribute to a stock of unknown market value, by means of arbitrary mathematical formulae, a portion of the cost basis, as respondent has done.
Therefore, in my opinion, the market value of the preferred stock received in the exchange should be applied against the basis of the original property and no profit on the sale of any of the property received will be realized until, out of the proceeds of such sales, shall have been recovered the entire cost o'f the original property.
