1 T.C. 100">*101 Respondent determined deficiencies in income tax of $ 74.84 and $ 1,340.48 for the years 1938 and 1939, respectively. Petitioner claims an overpayment of $ 3,051.13 for 1938.

Petitioner charges that respondent erred in computing the long term taxable gain on the disposition of certain bonds in 1939 by holding that since the cost basis had been previously recovered the entire amount received constituted1942 U.S. Tax Ct. LEXIS 34">*35 gain, 50 percent of which was taxable under section 117 (b) of the applicable law. Minor adjustments are not questioned. By amended answer, respondent raises the issue as to whether petitioner can now claim that its gain on the bonds is not taxable when received in 1939, and whether respondent is entitled to recoup 1930 tax barred by the statute of limitations to the extent of the claimed overpayment for 1938. There is an additional issue of the cost of the bonds in question on October 20, 1930.

FINDINGS OF FACT.

The facts stipulated by the parties are hereby found accordingly. The situation giving rise to the controversy, so far as we consider it material, was in substance as follows:

Petitioner is the executor of the estate of Isadore L. Myers, who died March 27, 1941. The Federal income tax returns for the years in question were duly filed with the collector of internal revenue at Baltimore, Maryland.

In 1930 Myers, who will sometimes hereinafter be referred to as the taxpayer, or decedent, owned 2,220 shares (1,850 common and 370 preferred) of the American Cement Tile Manufacturing Co. (hereinafter referred to as American), a Pennsylvania corporation with its principal place1942 U.S. Tax Ct. LEXIS 34">*36 of business in Pittsburgh, Pennsylvania. American's stock was closely held. Out of 6,000 authorized shares (5,000 common and 1,000 preferred), 300 (250 common and 50 preferred) were held in its treasury; taxpayer held the above mentioned 2,220; J. de S. Freund and his wife together owned 2,598 shares (2,165 common and 433 preferred); I. H. Freund held 450 shares (375 common and 75 preferred); S. B. Myers held 300 shares (250 common and 50 preferred) and H. C. Riale held 132 shares (110 common and 22 preferred).

Under date of September 4, 1930, American stockholders entered into an agreement with the Federal Cement Tile Co., an Illinois corporation (hereinafter referred to as Federal) which desired to take over the business and most of the assets of American, wherein the 1 T.C. 100">*102 stockholders represented that they had caused to be organized a Delaware corporation (American Liquidation Co., hereinafter referred to as Delaware) to which American would assign its lands, buildings, sidings, machinery and equipment, molds and forms, furniture, fixtures, and patents, and at their election would cause Delaware to acquire all or any part of American's capital stock. They agreed to cause1942 U.S. Tax Ct. LEXIS 34">*37 Delaware to transfer to Federal the assets, exclusive of the stock, for $ 609,900, payable $ 292,000 in cash and $ 317,900 in bonds of Federal. The stockholders further agreed to transfer to Federal the outstanding capital stock of American for $ 282,100, payable in bonds of Federal. The remaining assets of American, valued at $ 148,767.66, were to be transferred to Delaware. It was agreed that bonds of Federal for the aggregate sum of $ 600,000 were to be dated October 10, 1930, were to bear interest at 6 percent per annum, payable semiannually, and were to be payable serially $ 50,000 in each year on October 10, 1931, through 1935 and $ 350,000 on October 10, 1936. The bonds were to be secured by first mortgage or deed of trust on all Federal's real property, including buildings.

On September 2, 1930, Delaware was incorporated and on September 10, 1930, its directors ratified and adopted the above agreement and approved and adopted a plan of reorganization of American and Delaware. The plan provided as follows:

(a) Delaware was to issue 1,900 shares of its total authorized 3,000 shares to American in consideration of the agreement of American to transfer to Delaware all the1942 U.S. Tax Ct. LEXIS 34">*38 above mentioned assets, 150 shares of treasury stock of American and any other assets which might be assigned by American under the agreement of September 4, 1930.

(b) American was to reduce its capital stock from $ 600,000 face value to $ 300,000 face value, to be represented by 3,000 shares of which 150 would be treasury stock.

(c) American would distribute to the holders of its shares, exclusive of treasury stock, the 1,900 shares of Delaware.

(d) Delaware would then acquire the 2,850 outstanding shares of American in exchange for 950 shares of Delaware.

(e) Delaware would transfer to Federal the 3,000 shares of American and the plant and working assets of American.

(f) Federal would pay $ 282,100 in Federal bonds for the stock of American and $ 292,000 in cash and $ 317,900 in Federal bonds for the plant and working assets of American, and

(g) Delaware would distribute the cash and Federal bonds ratably to its stockholders.

In carrying out the plan, Delaware on October 13, 1930, authorized the assignment of the plant and working assets and 3,000 shares of American stock to Federal, but by subsequent authorization the assignment was made directly from American to Federal, and similarly1942 U.S. Tax Ct. LEXIS 34">*39 on 1 T.C. 100">*103 October 20, 1930, Delaware assigned the cash and bonds of Federal to the stockholders of Delaware. The taxpayer received cash in the sum of $ 102,272.58 and bonds having face value and maturity dates as follows:

After the above transactions Delaware held former assets of American, principally accounts receivable, of a net book value of $ 145,096.05. Delaware was formed for the purpose of receiving and liquidating those assets of American which Federal did not desire to acquire or which the stockholders of American did not desire to transfer, and for the purpose of discharging the contingent and other liabilities assumed or retained by American stockholders. Delaware continued in existence and engaged in carrying out these purposes. American was not immediately dissolved, but the assets retained by it were being liquidated by Federal in 1930 and 1931. A return of its operations for the last two months of 1930 was included in a consolidated return filed by Federal for the year 1930; the result1942 U.S. Tax Ct. LEXIS 34">*40 of the operations being a net loss. Thereafter American was inactive but had not been dissolved up to December 31, 1939.

In the agreement of September 4, 1930, American stockholders, including the taxpayer, had covenanted to indemnify Federal against all contingent liabilities of American. Federal thereafter made claim under this covenant against the stockholders and in settlement of the claim taxpayer in 1931 returned to Federal its bonds having a face value of $ 12,500.

In his income tax return for the year 1930 the taxpayer reported a capital gain of $ 102,272.58, being all the cash received by him as a stockholder of Delaware in that year. He appended to his return a statement reading as follows:

Gain on Reorganization of American Cement Tile Mfg. Co.

Stock of the American Liquidation Co. was received in 1930, pursuant to a plan of reorganization, both as a distribution by the American Cement Tile Mfg. Co. and in exchange for the stock of Am. C. T. Mfg. Co. which had been acquired by the undersigned prior to 1913 and in 1914, 1916, and 1919 (actual years of acquisition after 1913 being specified in each case).

Pursuant to said plan of reorganization, the Am. Liquidation1942 U.S. Tax Ct. LEXIS 34">*41 Co. distributed securities excluded from taxable income under Section 112 (g) of the Revenue 1 T.C. 100">*104 Act of 1928, together with cash distributed (not in partial or complete liquidation) from sources other than its accumulated earnings or profits.

Under Section 115 (d) of the Revenue Act of 1928, the entire amount of cash received by this taxpayer, deducting the share of this taxpayer in the expenses and liabilities incurred in connection with the transaction, is reported as a capital net gain.

Taxpayer's income tax return for 1930 was examined in the office of the internal revenue agent in charge for the district where the return was filed and at that time taxpayer furnished the agent with a copy of an opinion on the legal consequences of the transaction which had been prepared by Kixmiller, Baar and Morris, the attorneys who directed the reorganization. In the opinion it was stated, inter alia, as follows:

(a) The entire basis for the stock originally held is thus regarded as now represented by the bonds.

(b) Each interested individual is furnished with a statement * * * showing the items of cost or basic value which make up the total basis applicable to his stock in the Am. 1942 U.S. Tax Ct. LEXIS 34">*42 C. T. Mfg. Co., which has become his basis for the bonds acquired. This basis is allocable ratably to any amount of bonds. Upon the payment of the bonds or upon sale or other disposition, the amount by which the proceeds thus received is in excess of the basis for the bonds disposed of will represent a taxable profit, to be reported in the year of realization.

Thereafter the internal revenue agent in charge sent the taxpayer a letter dated October 8, 1932, stating that his office was recommending to respondent that the 1930 return be accepted as correct. No deficiency in income tax liability for the year 1930 has been determined by respondent.

In the case of two related stockholders respondent determined income tax deficiencies for 1930 by notices of deficiency dated February 28, 1933, on the basis that the entire gain derived was taxable and not limited to the amount of cash received. These stockholders appealed to the Board of Tax Appeals, which held that there was no deficiency, and on appeal by respondent the Board's decision was affirmed, Commissioner v. Freund (C. C. A., 3d Cir.), 98 Fed. (2d) 201.

On October 10, 1931, $ 15,000 par value1942 U.S. Tax Ct. LEXIS 34">*43 of taxpayer's bonds matured and were paid in full by Federal. In his income tax return for 1931 taxpayer reported the transaction showing proceeds of $ 15,000, basis of $ 6,597.51, and capital gain of $ 8,402.49. The detail of the transaction was accompanied by a statement reading as follows:

These bonds were acquired pursuant to a plan of organization [sic] and their basis is the same as that of the stock of the American Cement Tile Manufacturing Company previously held by the taxpayer.

On October 10, 1932, Federal defaulted in the payment of the principal amount of $ 50,000 then due on the serial maturity of its bonds and on the interest due on all the outstanding bonds. Thereafter principal payments were made on the taxpayer's bonds as follows: 1 T.C. 100">*105

Taxpayer did not report the receipt of the $ 56,025 in his income tax return for 1937. In his income tax return for 1938 he reported a long term capital gain of $ 32,059.58, reporting receipts of $ 128,452.46 giving the dates as January 5 and1942 U.S. Tax Ct. LEXIS 34">*44 May 5, 1938, and showing the cost or other basis as $ 96,392.88. Fifty percent of the gain, or $ 16,029.79, was recognized as a long term capital gain on distribution of assets held for more than 24 months. Attached to the return was a statement reading as follows:

Schedule F -- Capital Gains

Note A. These bonds were acquired in 1930, in a reorganization, in exchange for stock acquired at various dates prior thereto. The cost, 1913 value, and other bases for such stock has been used as the basis for the bonds.

Note B. In the retirement of these bonds, payments on account were made at various dates in 1937 and 1938, aggregating the amount stated above. The payments received in 1937 amounted to less than basis.

The proceeds of $ 19,523.84 received in 1939 were not reported as income in the taxpayer's return for that year. There was attached to his return a statement reading as follows:

Schedule F. (Long Term Capital Gains and Losses -- Assets Held for more than 24 Months)

On January 6, 1939, a payment of $ 19,523.84 was received on bonds of the Federal-American Cement Tile Company. These bonds were acquired in 1930 in a reorganization of the American Cement Tile Company and the1942 U.S. Tax Ct. LEXIS 34">*45 Federal Cement Tile Company. In the reorganization stock of the American Cement Tile Company was exchanged solely for cash and bonds. See Freund v. Commissioner 98 Fed. (2d) 201. Under the recent decisions of the Supreme Court, namely LeTulle v. Scofield, Helvering v. Tyng and Helvering v. Buchsbaum, the 1930 reorganization exchange was taxable. It is claimed that at the time of the exchange the bonds received had a fair market value equal to their par value. Therefore no gain is reported with respect to the payment on these bonds.

The taxpayer's returns for the years 1930 to 1939, inclusive, were filed on the basis of cash receipts and disbursements.

The facts are such that the statute of limitations now bars the assessment and collection of the deficiency in income tax for the year 1930. The income tax attributable to the excess of the proceeds of the bonds received in 1938 and 1939 over the basis used by petitioner is $ 3,051.13 for 1938, and $ 1,266.24 for 1939. If the transaction in 1930 was a taxable transaction in its entirety so that the gain on disposition of the 1 T.C. 100">*106 stock is to be measured by the excess of1942 U.S. Tax Ct. LEXIS 34">*46 the cash and fair market value of the bonds received over the basis of the stock exchanged therefor, and if the bonds at that time were worth $ 147,976.30, then the taxpayer's income tax liability for 1930 was understated by $ 5,576.90. If the bonds and cash received by the taxpayer in 1930 were taxable to him as a dividend and if the bonds had a fair market value when received of $ 147,976.30, then the taxpayer's income tax liability for the year 1930 was understated by $ 32,048.69.

American and Federal had net sales and net earnings for the period January 1, 1926, to September 30, 1930, as follows:

The average annual consolidated net earnings for the period above covered were approximately $ 203,229. American had average annual net earnings of approximately $ 55,000 for this period.

As shown by the books of American its assets and liabilities as of the dates indicated were as follows:

1 T.C. 100">*107 As shown by the books of American, its assets and liabilities as of October 1, 1930, as adjusted to give effect to all reorganization transactions were as follows:

1942 U.S. Tax Ct. LEXIS 34">*50 1 T.C. 100">*108 As shown by the books of Federal, its assets and liabilities as of the dates indicated were as follows:

1942 U.S. Tax Ct. LEXIS 34">*52 1 T.C. 100">*109 As of April 30, 1930, the plants of the American Cement Tile Manufacturing Co. were appraised by the American Appraisal Co. This company found and reported, as shown by its certificate of appraisal dated May 22, 1930, that the "sound values" of the plants of said company were as follows:

These values were said in the report to be based upon the following considerations:

Land upon its present utility with full consideration of prevailing market conditions.

Buildings and Equipment upon their cost of reproduction new in accordance with market prices current at the date of this appraisal for labor, material, and equipment, less an allowance for accrued depreciation in accordance with their age and condition, and with full consideration of their remaining expectancy of useful life as parts of a going concern.

As of June 30, 1930, the plant of the Federal Cement Tile Co. was appraised by the American Appraisal Co., which found and reported, as shown1942 U.S. Tax Ct. LEXIS 34">*53 by its certificate of appraisal dated July 23, 1930, that the "sound value" of the plant of said company was as follows:

1 T.C. 100">*110 These values were said to be based upon the same considerations as were applied with respect to the properties of the American Cement Tile Manufacturing Co., as above stated.

On October 13, 1930, the average for BAA industrial bonds as compiled by Moody's Investors Service stood at 6.23 percent yield, corresponding to a price of about 95 for bonds of this quality. The BAA classification is the lowest carried by Moody's. This average was constructed by the Moody Co. by using 25 bonds selected by them and having an average 20-year maturity.

As of September 9, 1930, American Asphalt Roof Corporation 6 1/2 percent first mortgage bonds, due 1932 to 1936, were quoted at par1942 U.S. Tax Ct. LEXIS 34">*54 to 102 for average maturities, according to the National Quotation Book, and as of November 29, 1930, the American Asphalt Roof Corporation bonds were quoted at 96 to par for the latest maturities. In round figures this company had fixed assets of $ 514,000 and a debt of $ 185,000. Earnings, as reported on December 30, 1930, ¹ available for interest charges were $ 10,614. Interest charges were $ 16,000. This company had current assets of $ 248,000, including cash in the amount of $ 42,900.

Article IV, section 3, of the trust indenture securing the bond issue provided that upon default the trustees, on the request of a majority of the holders of the outstanding bonds, should take over the property or proceed by legal process to protect the interests of the bondholders. Ordinarily the concurrence of holders of 25 percent of bonds is sufficient.

Earnings of industrial companies are likely to fluctuate from year to year.

The construction1942 U.S. Tax Ct. LEXIS 34">*55 business generally in 1930 was in a decline which it had been in since 1926.

The bonds were in denominations of $ 5,000 each. This fact would make them less salable.

The bonds in question had a fair market value of not less than $ 147,976.50 when they were received by decedent in 1930.

OPINION.

These facts, of course, are basically comparable to those in American Light & Traction Co., 42 B. T. A. 1121; affd. (C. C. 1 T.C. 100">*111 A., 7th Cir.), 125 Fed. (2d) 365. There are, it is true, certain deviations, as respondent points out. In the present case petitioner's change of position was not brought to respondent's attention until the statute had run on the earlier year. And the amount of tax demanded of petitioner would be less if respondent succeeded in this proceeding than would have been due had the original transaction been viewed in what we now know to be the proper light. The opposite was the case on both heads in American Light & Traction Co. and the opinion includes comments to that effect. But it seems clear that these considerations were mere makeweights and that the fundamental doctrine adopted by the Board there1942 U.S. Tax Ct. LEXIS 34">*56 went beyond any such detail.

There is no true "estoppel" in this proceeding any more than in American Light & Traction Co., since the facts were fully disclosed when the return for the earlier year was filed. If the petitioner there had no election, he had no greater one here. The law as it now stands would have compelled a single method of treatment. Le Tulle v. Scofield, 308 U.S. 415">308 U.S. 415. And it certainly would not be realistic to construe petitioner's dealings with respondent as a waiver by agreement when all that appears is a presentation of petitioner's view of the law in a discussion typical of innumerable controversies between taxpayers and administrative officials. In our view, accordingly, the case is not to be distinguished from American Light & Traction Co., supra, and on the authority thereof, the conclusion must be that the bonds acquired a new basis in decedent's hands and did not automatically retain the basis of the stock he had previously held.

What that new basis was, however, remains to be decided. It is almost trite to point out that the general rule under section 113 of the various revenue 1942 U.S. Tax Ct. LEXIS 34">*57 acts is that basis is cost. Poncin Corporation, 27 B. T. A. 328. And none of the exceptions or adjustments prescribed by that section are asserted to be relevant here. Certainly there is nothing in the statutory provisions which calls for the application under these circumstances of a basis computed by using fair market value when acquired. See Poncin Corporation, supra, p. 335. Just as the cost of property purchased for cash is the amount of money given for it, so it would seem to follow in a strict sense that the cost of property acquired in an exchange is what the recipient parts with, that is, the value of the property given in exchange.

Of this there is no specific proof. The principal disputed question of fact to which the evidence at the hearing was directed was the fair market value of the bonds when they were received and not that of the stock which was given in exchange. We think it fair to say, however, that ordinarily properties exchanged for one another can be assumed to be of equal value. There may be exceptions where one party to the transaction obtains the better of the deal, but no suggestion 1 T.C. 100">*112 1942 U.S. Tax Ct. LEXIS 34">*58 is made by respondent that this is such a situation and the case was not tried upon that theory. We proceed, therefore, from the premise that in this case the fair market value of the stock and assets transferred, less the cash received, which was the cost and therefore the basis of the bonds, was substantially equal to the fair market value of the bonds at that time. See Countway v. Commissioner (C. C. A., 1st Cir.), 127 Fed. (2d) 69.

The factual controversy as to the fair market value of the bonds we have determined in petitioner's favor. On the evidence we think there can be no reasonable doubt that the bonds when received were worth at least $ 147,976.30, and we have so found as a fact. Without reviewing the evidence in any detail, the financial position of the debtor, general business conditions, and the terms of the instruments make it appear unlikely in the extreme that such obligations would then have been worth less than 75 percent of their face value. On that valuation there was no taxable gain in these years. We therefore find it unnecessary to decide how much, if any, more than the figure given these bonds may have been worth.

So1942 U.S. Tax Ct. LEXIS 34">*59 far we have discussed the transaction on the assumption that it was an exchange. Respondent's brief continually refers to it as a "distribution" or as a "dividend." Without deciding whether this was technically an exchange or a distribution, it seems evident that if it was the latter it would have to be treated as a distribution in liquidation or out of capital. The new company, Delaware, which distributed the proceeds of the exchange to its stockholders, had no accumulated earnings and profits. Cf. Estate of Howard H. McClintic, 47 B. T. A. 188. Respondent does not contend that it "inherited" any of the earnings or profits of its predecessor, American, under the doctrine of Commissioner v. Sansome (C. C. A., 2d Cir.), 60 Fed. (2d) 931; certiorari denied, 287 U.S. 667">287 U.S. 667, a case which dealt with a tax-free transaction, whereas this is now recognized as having been wholly taxable. Nor did any gain result to Delaware from the exchange transaction itself, since the fair market value of what it received was the same as its basis for what it gave -- that is, the stock and assets of American which1942 U.S. Tax Ct. LEXIS 34">*60 it had in turn acquired for the issuance of its shares. See Ida I. McKinney, 32 B. T. A. 450; affd. (C. C. A., 10th Cir.), 87 Fed. (2d) 811. Since a distribution in liquidation is treated as being received in exchange for the stock and any other distribution from capital is taxable in the same manner as a gain from the sale or exchange of property, the end result is no different from viewing the transaction as an exchange in the first place. This accordingly differs from an ordinary dividend or other receipt which costs the recipient nothing, see Greenwood Packing Plant, 46 B. T. A. 430, and where perhaps the failure to report the transaction in the earlier year would give the property a basis of 1 T.C. 100">*113 zero and require the entire proceeds to be included in income upon disposition. Estate of H. H. Timken, 47 B. T. A. 494.

Nor is the Court in any position to sustain respondent's affirmative defense of recoupment to the extent of the claimed overpayment in view of the "controlling evidences of the Congressional purpose by the enactment of sections 607 and 6091942 U.S. Tax Ct. LEXIS 34">*61 [Revenue Act of 1928] to require refund to the taxpayer of an overpayment, even though he has failed to pay taxes for other periods, whenever their collection is barred by limitation," McEachern v. Rose, 302 U.S. 56">302 U.S. 56. The deficiencies were accordingly improper and the claim of overpayment must be allowed.

Decision will be entered under Rule 50.

Murdock, J., concurring: The bonds here in question were acquired in 1930, when they were received in exchange for the stock. The gain or loss upon the disposition of the stock should have been computed by taking the fair market value of the bonds as the amount realized upon the disposition of the stock. That same value of the bonds must be considered thereafter as the basis for gain or loss upon the bonds, otherwise there will be a possibility of double taxation or else an escape of taxation upon the disposition of the bonds. The fair market value of the bonds is regarded as the equivalent of cash for computing gain or loss on the disposition of the stock, and henceforth the bonds must be regarded for tax purposes as if they had been acquired for that much cash. For these reasons, the fair1942 U.S. Tax Ct. LEXIS 34">*62 market value of the stock at the time it was given in exchange for the bonds is not regarded as the cost or basis of the bonds for income tax purposes.