Opinion
Action by Gertrude Vanderbilt Whitney and others, executors of the estate of Harry Payne Whitney, deceased, against the United States.
Petition dismissed
Basis for determining gain or loss on taxpayer's sale in 1926 of corporation stock, acquired in exchange for other stock in 1922, was cost or March 1, 1913, value of stock exchanged therefor, not 1922 value of latter stock. Revenue Act 1921, § 202(c) (1), as amended by Act March 4, 1923, 42 Stat. 1560; Revenue Act 1921, § 202(d) (1), 42 Stat. 229; Revenue Act 1926, §§ 203(b) (1), 204(a) (6), 26 U.S.C.A. §§ 112-114.
Plaintiffs seek to recover $287,385.85, income tax alleged to have been erroneously and illegally collected for 1926. Prior to March 1, 1913, Harry Payne Whitney, the decedent, acquired certain shares of stock of the Standard Oil Company and of the R.J. Reynolds Tobacco company. In October and November, 1922, he exchanged this stock, in a transaction not in pursuance of a plan of reorganization, for certain stock of the Mammoth Oil Company and the Sinclair Consolidated Oil Company. The last-mentioned stock was sold in 1926.
Plaintiffs contend that the basis to be used in determining the loss deductible from income in 1926 as "cost" of the stock of the Mammoth Oil Company is the fair market value at the date of exchange in 1922 of the stock of the Standard Oil Company and the R.J. Reynolds Tobacco Company exchanged therefor, or, in the alternative, the fair market value of the stock of the Mammoth Oil Company at the date of the exchange in 1922.
The defendant contends that the stock of the Mammoth Oil Company received in the exchange in 1922 should be treated as taking the place of the stock of the Standard Oil Company and of the R.J. Reynolds Tobacco exchanged therefor, and that the basis to be used in determining gain or loss on the sale of the stock of the Mammoth Oil Company under the provisions of section 202(c) and (d) of the Revenue Act of 1921, 42 Stat. 230, and sections 203(b) and 204(a)(6) of the Revenue Act of 1926, 44 Stat. 12, 14 (see 26 U.S.C.A. §§ 112(b), 113(a)(6) and notes) is the cost or March 1, 1913, value, whichever is greater, of the stock of the Standard Oil Company and the R.J. Reynolds Tobacco Company exchanged for the stock of the Mammoth Oil Company.
Special Findings of Fact.
1. Harry Payne Whitney, a resident of New York, died October 26, 1930. He left a will which was duly probated in the surrogate's court of New York county November 7, 1930, and letters testamentary were issued to the plaintiffs November 8, 1930. The plaintiffs are now and have been continuously executors of the estate.
2. The decedent prior to March 1, 1913, acquired for investment 2,000 shares of the common stock of the Standard Oil Company of New York, 8,000 shares of the common stock of the Standard Oil Company of New Jersey, and 29,000 shares of the common B stock of the R.J. Reynolds Tobacco Company. The cost and March 1, 1913, value of such stock were as follows:
March 1, 1913
-----------------------
Cost
Value
2,000 shs., Standard Oil Co. of New York
$96,000.00
$260,000.00
3,040 shs., Standard Oil Co. of New Jersey
346,392.80
283,100.00
4,960 shs., Standard Oil Co. of New Jersey
783,680.00
461,900.00
6,000 shs., R.J. Reynolds Tobacco Co.
65,000.00
91,296.00
23,000 shs., R.J.Reynolds Tobacco Co.
249,435.00
349,968.00
In October, 1922, the decedent, in a transaction not in pursuance of a plan of reorganization, exchanged 2,000 shares of the common stock of the Standard Oil Company of New York, 8,000 shares of the common stock of the Standard Oil Company of New Jersey, and 6,000 shares of the common B stock of the R.J. Reynolds Tobacco Company for 50,000 shares of the common stock of the Mammoth Oil Company and 55,000 shares of the common stock of the Sinclair Consolidated Oil Company. The exchange was not returned for income tax purposes, and the taxpayer did not pay any income or profits tax thereon. On the date of the exchange, the fair market value of the various shares of stock exchanged and acquired upon the exchange was as follows:
Fair Market Value on date of exchange in October 1922
2.000 shs., Standard Oil Co. of New York
$1,294,000.00
8,000 shs., Standard Oil Co. of New Jersey
1,890,000.00
6,000 shs., R.J. Reynolds Tobacco Co.
336,000.00
-------------
Total
$3,520,000.00
-------------
50,000 shs., Mammoth Oil Co.
$1,750,000.00
55,000 shs., Sinclair Consolidated Oil Co.
1,768,750.00
-------------
Total
$3,518,750.00
4. In November, 1922, the decedent, in a transaction not in pursuance of plan of reorganization, exchanged 23,000 shares of the common B stock of the R.J. Reynolds Tobacco Company for 55,000 shares of the common stock of the Mammoth Oil Company. The exchange was not returned for income tax purposes, and the taxpayer did not pay any income or profits tax thereon. On the date of the exchange the fair market value of the 23,000 shares of B stock of the R.J. Reynolds Tobacco Company was $1,242,000, and the fair market value of the 55,000 shares of common stock of the Mammoth Oil Company was $1,237,500. July 18, 1924, the decedent purchased 8,248 shares of the common stock of the Mammoth Oil Company for $139,555.60 cash.
5. During the year 1926, the decedent sold the aforesaid 113,248 shares of common stock of the Mammoth Oil company for $3,000, and in making the sale he incurred and paid expenses of$6,798.88.
6. June 15, 1927, decedent and his wife, Gertrude Vanderbilt Whitney, one of the plaintiffs herein, filed a single income tax return of their joint net income for 1926 showing a tax liability of $262,066.51, which was assessed and paid during 1927. On this return the amount of $3,135,973.68 was deducted as the loss sustained upon the sale of the 113,248 shares of common stock of the Mammoth Oil Company; the amount of the loss being computed upon the theory that the basis for determining the loss upon the sale of the 105,000 shares acquired in the exchanges described above was the fair market value on the dates of
Basis
50,000 shs., Mammoth Oil Company
stock: That proportion of the fair
market value of the shares of stock
exchanged which the fair market value
of the Mammoth Oil Company stock
bore to the total fair market value of
all the shares of stock received upon
(1,750,000
the exchange of --------- $3,520,000)
$1,750,619.20
3,518,750
55,000 shs., Mammoth Oil Company
stock: The fair market value at the
date of exchange of the shares of stock
exchanged therefor
1,242,000.00
8,248 shs., Mammoth Oil Company stock:
The cost thereof in July 1924
139,555.60
-------------
113,248 shs.
$3,132,174.80
Proceeds of sale of the 113,248
shares in 1926
$3,000.00
Expenses of sale:
Commissions
$2,264.96
Transfer Stamps
4,529.92
Advertising
4.00
6,798.88
---------
Excess of selling expenses over proceeds
3,798.88
Loss deducted on tax return
-------------
$3,135,973.68
In a memorandum attached to the return for 1926, the aforesaid exchanges of stock were further explained as follows: The exchange in 1922 by the taxpayer of stock of the Standard Oil Company of New Jersey, Standard Oil Company of New York, and R.J. Reynolds Tobacco Company for stock of the Mammoth Oil Company resulted in a gain to the taxpayer, but this gain was not included in the 1922 return of this taxpayer, as it was exempt from taxation by section 292)c)(1) of the Revenue act of 1921 (prior to the amendment of 1923), which specifically provided that for income tax purposes such gain should not be recognized.
7. Thereafter, the Commissioner examined the return, and determined and assessed an additional tax for 1926 of $240,312.30. This additional tax, together with interest thereon of $49,580.05, was paid September 5, 1930.
The additional tax was caused in part by a redetermination of the loss sustained upon the sale of the 105,000 shares of Mammoth Oil Company stock, the Commissioner determining that the basis for computing the loss was the cost or March 1, 1913 value, whichever was greater, of the shares of stock exchanged for the 105,000 shares of stock of the Mammoth Oil Company, and in accordance with such determination he redetermined the loss as follows:
50,000 shs., Mammoth Oil Company stock: That proportionof the
cost or March 1, 1913, value (whichever was greater) ofthe
shares of stock exchanged which the fair market valueof the
Mammoth Oil company stock bore to the total fair marketvalue
of all the shares of stock received upon the exchange
(1,750,000
of $1,481,368.80)
$736,738.03
3,518,750
55,000 shs., Mammoth Oil Company stock:
The March 1, 1913, value of the shares exchangedtherefor
349,968.00
8,248 shs., Mammoth Oil Company stock.
The cost thereof in July 1924
139,555.60
-------------
113,248 shs.
$1,226,261.63
Excess of selling expenses over proceeds of salein
1926 3,798.88
-------------
Loss as determined by Commissioner
$1,230,060.51
Loss deducted on return by decedent and hiswife
3,135,973.68
-------------
Amount by which the Commissioner increasedincome
$1,905,913.17
8. January 19, 1931, plaintiffs filed claim for refund of $238,239.14 of the additional tax paid and likewise for the refund of the interest of $49,146.71 on the ground that the basis for determining the loss on the sale of the 105,000 shares of stock of the mammoth Oil Company was the fair market value at the dates of exchange of the shares of stock exchanged therefor, or, in the alternative, that the basis for determining the loss on the sale was the fair market value of the stock of the Mammoth Oil Company when received in October and November, 1922. The claim for refund was rejected April 29, 1932.
9. If the correct basis for determining the loss on the sale in 1926 of the 105,000 shares of stock of the Mammoth Oil Company is the fair market value thereof when received by decedent in October and November, 1922, or the fair market value at the dates of exchange of the securities given up by the decedent in October and November, 1922, in exchange for the 105,000 shares of stock of the Mammoth Oil Company, then plaintiffs are entitled to recover $287,335.07, or $287,385.85, respectively, together with interest from September 5, 1930; otherwise plaintiffs are not entitled to recover.
Conclusion of Law.
Will R. Gregg and John W. fisher, both of Washington, D.C., for plaintiffs.
Guy Patten, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court decides, as a conclusion of law, that plaintiffs are not entitled to recover, and the petition is dismissed.
Judgment is rendered against plaintiffs for the cost of printing the record herein; the amount thereof to be entered by the clerk and collected by him according to law.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
LITTLETON, Judge.
The provisions of the revenue act of 1921, as amended by the act of March 4, 1923, and the revenue act of 1926, relating to the question presented in this case, are set forth in the footnote. When the decedent acquired the stock of the Mammoth Oil Company in 1922, he became the owner of property which, at that time, was worth $1,905,913.17 more than the cost to him or the March 1, 1913, value of the stocks of the Standard Oil company and the R.J. Reynolds Tobacco Company which he exchanged therefor. However, this gain was not taxable for the reason that the 1921 Revenue Act provided that no gain or loss should be recognized upon exchange of property held for investment. But this was not a tax exemption under the 1921 act. That provision of the 1921 act was based upon the principle that nothing of substance had happened since the stock received in exchange simply took the place of the stock exchanged therefor. The basis to be used in determining gain or loss on the sale or disposition of the newly acquired stock was therefore plainly the cost or the March 1, 1913, value of the old stock exchanged therefor.
Revenue Act of 1921, § 202(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--
One of plaintiffs' contentions is that the basis for the determination of gain or loss on the sale or disposition of new stock was the value in 1922 of the old stock exchanged therefor. Under this contention the decedent could, except for the provisions of section 202(d)(1) of the 1921 act, have sold the stock of the Mammoth Oil Company for its then realizable market value immediately upon completion of the exchange and realized an actual cash profit of $1,905,913.17 without any portion thereof being subject to income tax. It is clear, we think, that this would have been contrary to the plain purpose and intent of section 202(c)(1) of the 1921 act, even though subdivision (d)(1) thereof had not been enacted. Subdivision (d)(1) of section 202 plainly prohibited such a result. It provided that: "Where property is exchanged for other property and no gain or loss is recognized under the provisions of subdivision (c), the property received shall, for the purposes of this section, be treated as taking the place of the property exchanged therefor, except as provided in subdivision (e)." This provision only make plain what otherwise would have followed in practice in exchanges of this character, namely, that the basis of the new stock should be the basis of the old stock exchanged for it.
Plaintiffs argue that section 204(a)(6) of the Revenue act of 1926 relates only to exchanges which are tax free under that act and to exchanges of the same kind which were taxable under earlier acts, and that in drafting section 204(a)(6) of the 1926 act Congress overlooked the fact that certain exchanges therein made taxable had been free of tax under the act of 1921. It is upon this interpretation of the 1926 act that they based their claim for a loss in 1926 of $1,905,913.17 in excess of their actual loss. When Congress provided by section 202(c) of the Revenue Act of 1921 that no gain or loss should be recognized in the case of an exchange of property held for investment, we think it is clear that it did not overlook the fact that the property received upon such exchange might thereafter be sold. In order, therefore, that no permanent tax exemption of gain might be given or loss denied, subdivision (d)91) of the section was enacted to make it plain that the property received should take the place of the property exchanged therefor. Thus congress provided for the ultimate determination of gain or loss upon the basis of actual facts, and we are of opinion that this rule was not changed by sections 203(d)(1) and 204(a)(6) of the Revenue Act of 1926.
Section 202(c)(1) of the 1921 act was amended by the Act of March 4, 1923, by which amendment gain or loss was recognized for income tax purposes upon exchanges of the character involved in the case at bar. This act of 1923 did not amend section 202(d)(1) of the 1921 act, thereby preventing an increase of basis in the case of nontaxable exchanges under the Revenue act of 1921. In this amendment of the 1921 act it is clear that Congress was aware of the fact that such exchanges had theretofore been nontaxable.
That portion of section 204(a)(6) of the Revenue Act of 1926, heretofore quoted, and upon which plaintiffs rely, is identical with section 204(a)(6) of the Revenue Act of 1924 (43 Stat. 258), and we think it is clear that Congress did not overlook the fact in the enactment of these two statutes in 1924 and 1926 that exchanges of property of the character here involved had theretofore been nontaxable. The report of the Committee on Ways and Means, 68th Congress, 1st Sess., with reference to the basis for determining gain or loss stated with reference to section 204 of the Revenue Act of 1924, as follows: "(2) Paragraph (6) corresponds to section 202(d)(1) of the existing law [Act of 1921]. The general theory of this section is that where no gain or loss is recognized as resulting from an exchange, the new property received shall, for purposes of determining gain or loss from a subsequent sale and for depreciation and depletion, be considered as taking the place of the old property given up in connection with the exchange. The provisions of section 203 of the bill that no gain or loss is recognized from certain exchanges do not grant an exemption and are not so intended. * * * "
What we have stated above shows, we think, that congress was aware at all times that certain of the exchanges of property"described" in the statutes subsequent to the 1921 act and including the act of 1926 were nontaxable under the Revenue Act of 1921. The history of the entire legislation on this subject compels the conclusion that by sections 204(a)(6) and 203(b)(1) of the Revenue Act of 1926, Congress intended to continue to regard nontaxable exchanges under the 1921 act as they had been treated by that act with respect to the basis to be used in the determination of gain or loss upon the sale or disposition of new stock received upon such exchanges.
We think the Commissioner was clearly right in his determination, and plaintiffs are not entitled to recover. The petition is therefore dismissed, and it is so ordered.
"(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use: * * *
"(d)(1) Where property is exchanged for other property and no gain or loss is recognized under the provisions of subdivision (c), the property received shall, for the purposes of this section, be treated as taking the place of the property exchanged therefor, except as provided in subdivision (e)." (42 Stat. 230).
Act of March 4, 1923. "That paragraph (1) of subdivision (c) of section 202 of the Revenue Act of 1921 is amended, to take effect January 1, 1923, to read as follows: '(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale, and in the case of property held for investment not including stock, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest), is exchanged for property of a like kind or use." 42 Stat. 1560.
Revenue Act of 1926. "Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
"(b)(1) No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment, or if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation. * * *
"Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that--* * *
"(6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchange, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made." (44 Stat. 12, 14).