11 T.C. 397">*397 Respondent determined deficiencies against petitioner for the fiscal years ended June 30, 1942 and 1943, respectively, as set forth below, and petitioner claims refunds of overpayments for such years as set forth: 11 T.C. 397">*398

Petitioner claims that it is entitled to deductions for depreciation in the amount of not less than $ 78,641.70 for the fiscal year ended June 30, 1942, and 1948 U.S. Tax Ct. LEXIS 81">*83 $ 70,050.75 for the fiscal year ended June 30, 1943. ¹ In his determination of the above stated deficiencies, respondent allowed deductions for depreciation sustained of $ 21,298.95 for the taxable year ended June 30, 1942, and $ 22,316.77 for the taxable year ended June 30, 1943.

The basic issue in this case is whether the exchange on June 3, 1936, whereby petitioner's assets were acquired, was one in which gain or loss is to be recognized for tax purposes. If gain or loss is to be recognized, then the proper basis for the assets is their cost to petitioner on the date of their acquisition, as is contended by the petitioner. If the exchange is one in which no recognition is given to gain or loss, then the proper basis for the assets is their basis in the hands of the transferors, as contended by the respondent.

It is stipulated that petitioner's closing1948 U.S. Tax Ct. LEXIS 81">*84 inventory on June 30, 1943, as shown in its original returns for the taxable year ended on that date, was inadvertently understated by the amount of $ 65,305.87, and petitioner's net income, net income for declared value excess profits, and adjusted excess profits net income were accordingly understated by the same amount. Appropriate adjustments for this item may be made in a recomputation under Rule 50.

Petitioner filed its income and declared value excess profits tax returns for the taxable year ended June 30, 1942, and its income, declared value excess profits, and excess profits tax returns for the taxable year ended June 30, 1943, with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.

The case was submitted on a stipulation of facts, oral testimony, and evidence admitted at the hearing. The facts as stipulated are so found. Such parts of the stipulation of facts and facts found from the evidence as are considered necessary are set forth below.

FINDINGS OF FACT.

Petitioner, a Pennsylvania corporation, was incorporated on June 2, 1936, and its principal office and place of business is in Butler, Pennsylvania.

11 T.C. 397">*399 American 1948 U.S. Tax Ct. LEXIS 81">*85 Austin Car Co. (hereinafter called Austin), a Delaware corporation organized in February 1929, which owned and operated an automobile-manufacturing plant in Butler, Pennsylvania, filed a voluntary petition for reorganization under section 77-B of the National Bankruptcy Act on June 29, 1934.

On July 23, 1935, upon a petition of the Pullman Standard Car Manufacturing Co., the mortgagee, the United States District Court entered an order declaring that no reorganization of Austin could be effected and directing that Austin be liquidated. The reorganization court directed that an appraisal be made of the value of the Austin assets, and on August 10, 1935, the appointed appraisers found their worth to be $ 246,114.02.

On August 21, 1935, the liquidating trustee sold the assets of Austin to R. S. Evans, Martin Tow and W. A. Ward, Jr., (hereinafter collectively called the associates) for the price of $ 5,000 cash. The assets were bought subject to certain liabilities of Austin in the amount of $ 219,099.83, consisting of a mortgage of $ 150,000 upon the Austin Plant at Butler, Pennsylvania, accrued and unpaid interest upon the mortgage in the amount of approximately $ 36,000, and accrued1948 U.S. Tax Ct. LEXIS 81">*86 and unpaid real estate taxes thereon in the amount of approximately $ 33,100.

A general plan of organizing the petitioner to take over the Austin assets from the associates was conceived in May 1936. The plan contemplated the organization of a Pennsylvania corporation, to be known as the American Bantam Car Co. The salient points of the contemplated plan included the following: The associates were to receive in exchange for their transfer of Austin assets to petitioner 300,000 shares of no par common stock, which would comprise all of the petitioner's issued stock upon its issuance to the associates; transfer to petitioner of such assets would be subject to liabilities totaling $ 219,099.83; 90,000 shares of petitioner's preference stock would be offered to the public at $ 10 a share; the underwriters of such issue of preferred stock were to receive from the associates, in addition to their underwriting discounts and commissions, and as further compensation for their services as underwriters, certain amounts of the common stock issued to the associates as and if they effected sale to the public of certain amounts of the preference stock. All the interested parties orally agreed1948 U.S. Tax Ct. LEXIS 81">*87 to the substance of this plan prior to June 2, 1936, though there was no formal written contract between the parties at this time.

On May 25, 1936, the associates secured the services of the American Appraisal Co. to value the Austin assets. That company found that the Austin assets had a worth of $ 840,800 to a going concern engaged in the manufacturing of automobiles at normal plant capacity.

11 T.C. 397">*400 On June 2, 1936, petitioner was incorporated under the laws of the Commonwealth of Pennsylvania, with an authorized capital stock of 700,000 shares, consisting of 100,000 shares of preference stock of the par value of $ 10 per share and 600,000 shares of common stock without par value.

Petitioner's articles of incorporation provided:

At all meetings of stockholders the holders of preferred stock shall be entitled to 3 votes for each share of preferred stock held by them, and the holders of common stock shall be entitled to 1 vote for each share of common stock held by them.

On June 3, 1936, the associates transferred to petitioner the Austin assets, subject to liabilities which at the time amounted to $ 219,099.83, together with the sum of $ 500 in cash and, simultaneously therewith, 1948 U.S. Tax Ct. LEXIS 81">*88 petitioner issued to the associates 300,000 shares of its common stock in proportion to their respective interests in these properties.

The respective interests of the associates in the Austin assets acquired by them on August 21, 1935, were on such date and at the time of the transfer by them of such assets to petitioner as follows:

The 300,000 shares of common stock issued to the associates by petitioner on June 3, 1936, were issued in the following proportions:

On June 3, 1936, when the Austin assets were acquired, petitioner had no working capital, no labor force, and no sales organization.

On June 8, 1936, petitioner executed a written contract with Dingwall & Co., a New York corporation, and Tooker & Co., a partnership, providing for an irrevocable and exclusive selling order on 90,000 shares of petitioner's convertible preference stock for a period of 6 months from the effective date granted by the Securities Exchange Commission at a public offering price of $ 10 per share, less commissions 1948 U.S. Tax Ct. LEXIS 81">*89 of 15 per cent and allowance expenses of 5 per cent. The following selling schedule was provided: 20,000 shares during the first 2 months after the effective date granted by the Securities Exchange Commission; 15,000 shares during the third month after such date; 17,500 shares during the fourth month after such date; 17,500 shares during the fifth month after such date; and 20,000 shares during the sixth month after such date. If Dingwall & Co. and Tooker & Co. failed to execute the selling order in accordance with this schedule, petitioner was given the option to cancel the selling order on 10 days' notice.

11 T.C. 397">*401 On June 8, 1936, concurrently with the above contract, the associates entered into a written contract with (a) Dingwall, (b) James Botz, who was a partner in Tooker & Co., and (c) Edgar S. Grant, a wholesaler for Dingwall. In substance the associates agreed to deliver to the Butler County National Bank & Trust Co. of Butler, Pennsylvania, certificates for 100,000 shares of common stock endorsed in blank for transfer to the underwriters. The underwriters were to be entitled to receive the stock in the amounts and at the times stated as follows: 22,500 shares of common1948 U.S. Tax Ct. LEXIS 81">*90 stock when 20,000 shares of convertible preference stock had been sold, 16,500 shares of common stock when the next 15,000 shares of such convertible preference stock had been sold, 19,500 shares of common stock when the next 17,500 shares of such convertible preference stock had been sold, 19,500 shares of common stock when the next 17,500 shares of such convertible preference stock had been sold, and 22,000 shares of common stock when the next 20,000 shares of such convertible preference stock had been sold.

It was provided that in the event the selling order contained in the agreement between the petitioner and Dingwall & Co. and Tooker & Co. was canceled pursuant to the cancellation provisions mentioned, then this agreement should likewise be canceled with respect to the shares of common stock to which the underwriters had not become entitled at the end of the notice of cancellation.

On August 16, 1936, the associates and the Butler County National Bank & Trust Co., as trustee, executed two articles of agreement. By these two agreements (one involving 100,000, the other 200,000 of the 300,000 shares of petitioner's stock issued to the associates on June 3, 1936) the associates1948 U.S. Tax Ct. LEXIS 81">*91 in their respective amounts surrendered their 300,000 shares of common stock to be held by the bank in escrow. The agreements provided that the bank was only custodian of the stock endorsed in blank. By their terms the bank was to hold the shares until the public offering of 90,000 of convertible preference stock was completely sold for cash and the entire proceeds therefrom of $ 720,000 were received by the petitioner; then the bank was to surrender the common stock to the associates for distribution to those dealers legally entitled thereto.

During the year 1936 only 14,757 shares of the preferred stock was sold by the underwriters. Finally, Grant & Co. succeeded Dingwall & Co., and Tooker & Co. as underwriters. Between October 1936 and October 1937 Grant sold 83,618 shares of convertible preferred stock to the public for $ 866,410 (there were no sales of convertible preferred stock between June 2, 1936, and October 1936). There was no sale of common stock from June 3, 1936, to October 1, 1937. By October 31, 1937, Grant had sold 1,008 shares of comon stock to the public.

11 T.C. 397">*402 During October 1937 the associates, pursuant to their agreement with the underwriters of June1948 U.S. Tax Ct. LEXIS 81">*92 8, 1936, transferred to Grant 87,900 shares of petitioner's common stock out of the 300,000 shares previously issued to them.

Petitioner's stocks were held on October 31, 1937, in the following manner:

In all of the income tax returns filed by the petitioner for its taxable years through June 30, 1941, its basis for the assets acquired from the associates on June 3, 1936, was stated to be $ 145,075.66. For the taxable years ended, respectively, June 30, 1942, and June 30, 1943, in which petitioner showed profit from war production, petitioner stated the basis of Austin assets to be $ 840,800.

OPINION.

This case requires the determination of the proper basis for the Austin assets acquired by petitioner on June 3, 1936, in exchange for stock. We must decide whether under the facts here section 113 (a) (8) (A) of the Internal Revenue Code requires petitioner, in computing deductions for depreciation, to take as the basis of the assets so acquired the basis thereof in the hands of the transferors. This section is applicable if the exchange by which1948 U.S. Tax Ct. LEXIS 81">*93 petitioner received the Austin assets was one in which gain or loss is not recognized under the provisions of section 112 (b) (5) of the Revenue Act of 1936, ² the year of the exchange. We therefore must first consider whether, when the associates turned over the Austin assets to petitioner, subject to liabilities of $ 219,099.83, plus $ 500 in cash, and in return petitioner issued to the associates 300,000 shares of its no par common stock, all the requirements of section 112 (b) (5) were satisfied.

At the outset it should be noted that the statute requires for a nontaxable exchange that the property turned1948 U.S. Tax Ct. LEXIS 81">*94 over by the transferors be "solely" in exchange for stock or securities of the transferee corporation. The transferors in the instant case actually received from petitioner 11 T.C. 397">*403 upon the exchange only 300,000 shares of common stock. Thus, the statutory requirement is met unless it can be said the transferors indirectly received "other property or money" by virtue of the fact the petitioner acquired the transferred property subject to liabilities. Section 213 (f) of the Revenue Act of 1939 ³ specifically states that such an acquisition of property subject to liability shall not be considered as "other property or money" received by the transferors. It is clear that a definite business purpose motivated this transaction. Therefore such acquisition by the petitioner does not prevent the exchange from being within the provisions of section 112 (b) (5) and the transferors in exchange for their property did receive "solely" stock from the corporation.

1948 U.S. Tax Ct. LEXIS 81">*95 It has been held that money turned over to the transferee corporation by the transferors does not prevent a tax-free exchange, for it is includible within the term "property" in section 112 (b) (5). Regulations 111, sec. 29.112 (b)-5; C. B. 1944, p. 219; Haliburton v. Commissioner, 78 Fed. (2d) 265. Therefore, the $ 500 transfer of cash to petitioner by the associates comes within the terms of section 112 (b) (5).

The first major test of a tax-free exchange under section 112 (b) (5) is whether the transferors have "control" of the corporation immediately after the exchange. Section 112 (h) of the Revenue Act of 1936 defines "control":

As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

11 T.C. 397">*404 The first question, then, is whether the associates had such "control" over the petitioner immediately after the exchange on June 3, 1936. Prima facie, when the various steps taken to organize the new corporation and transfer1948 U.S. Tax Ct. LEXIS 81">*96 assets to it are considered separately, the associates did have "control" of the petitioner immediately after the exchange within the statutory definition of the word. We think that from June 3 to June 8, 1936, they owned 100 per cent of all the issued stock, and from June 8, 1936, until October 1937 they owned stock possessing at least 80 per cent of the total combined voting power of all classes of stock. On June 3, 1936, the associates were issued absolutely and unconditionally 300,000 shares of no par common stock. The resolution of the board of directors of petitioner accepting the associates' offer of the Austin assets attached no strings whatsoever to the issuance of the stock to them. It is true that on June 2, 1936, petitioner had an authorized capital stock of 700,000 shares, 600,000 common shares and 100,000 preferred shares, but in determining control only stock actually issued is considered. Louangel Holding Corporation v. Anderson, 9 Fed. Supp. 550. On June 8 no other common stock had been issued, and a contract regarding possible future assignment of those 300,000 shares already issued was not entered into before that date. No1948 U.S. Tax Ct. LEXIS 81">*97 preferred stock had been issued on June 3, nor was a contract for its sale provided until June 8. The statutory words "immediately after the exchange" require control for no longer period; in fact, momentary control is sufficient. Evans Products Co., 29 B. T. A. 992. Certainly, therefore, the associates had absolute control over the corporation from June 3 to June 8, 1936, due to their complete ownership of all outstanding stock.

It is true that, by virtue of their agreement with the associates on June 8, 1936, the underwriters did at that time acquire the right to earn shares of the common stock issued to the associates by the sale of certain percentages of preferred stock, but the ownership of the 300,000 shares remained in the associates until such sales were completed. It is significant to note that this agreement stated that the associates were the owners of the 300,000 shares. On August 16, 1936, the associates deposited all their shares in escrow with the Butler County National Bank & Trust Co., but they only surrendered possession by the terms of their agreement with the bank and retained all other attributes of ownership.

During all of 19361948 U.S. Tax Ct. LEXIS 81">*98 the associates retained ownership over the 300,000 shares of common stock and during that interval the underwriters sold only 14,757 shares of preferred stock, which did not entitle them to any common stock under the agreement of June 8, 1936. The corporation's bylaws provided that each share of preferred stock should have 3 votes, while each share of common stock should have 1 vote. 11 T.C. 397">*405 Therefore, at the end of 1936, out of 344,271 possible stock votes, the total combined voting power of all outstanding stock, the associates owned 300,000, or over 80 per cent. It was not until October 1937, when the underwriter Grant received 87,900 shares of the associates' common stock in fulfillment of the underwriting agreement, that the associates lost "control" of petitioner within the statutory definition of the word. Retention of "control" for such a duration of time satisfies the governing provision of section 112 (b) (5).

Petitioner, however, contends that the series of steps organizing the new corporation, transferring assets to it, and arranging for the sale of its preference stock must be considered as parts of the integrated plan formulated in May 1936, and, therefore, considered1948 U.S. Tax Ct. LEXIS 81">*99 as parts of a single transaction. It argues that this unified transaction started on June 2, 1936, when petitioner was incorporated, and ended in October 1937, when the public offering of the preferred stock by the underwriters ceased and Grant was awarded 87,900 shares of common stock; that the transfer of common stock to Grant in 1937 was the final step of an indivisible operation and must be viewed concurrently with the preceding steps. On this theory the associates did not obtain control of petitioner, for on consummation of this final step in the general plan the associates had only 212,100 shares of common stock, while Grant had 86,892 shares and the public had 1,008 and there were 83,618 shares of outstanding preferred stock owned by the public. The 212,100 stock votes held by the associates in October 1937 fell shy of the required 80 per cent to give the requisite control.

In determining whether a series of steps are to be treated as a single indivisible transaction or should retain their separate entity, the courts use a variety of tests. Paul, Selected Studies in Federal Taxation, 2d series, pp. 200-254. Among the factors considered are the intent of the parties, the1948 U.S. Tax Ct. LEXIS 81">*100 time element, and the pragmatic test of the ultimate result. An important test is that of mutual interdependence. Were the steps so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series?

Using these tests as a basis for their decisions the courts in Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, and Bassick v. Commissioner, 85 Fed. (2d) 8, treated the series of steps involved in each case as parts of a unified transaction and therefore determined that the transferors of assets to the new corporation did not acquire the requisite control. An analysis of the fact situations involved shows salient distinguishing features from the present facts. In each of the above cases there was a written contract prior both to the organization of the new corporation and the exchange of assets for stock which bound the transferors unconditionally to assign part of the stock acquired 11 T.C. 397">*406 to third parties after the exchange. Thus, at the moment of the exchange the recipient of the stock did not own it, but held it subject to a binding contractual1948 U.S. Tax Ct. LEXIS 81">*101 obligation to transfer a portion. The court in each case thought that the incorporation and exchange would never have been agreed upon without the supplemental agreement turning over stock to a third party. In such situations it is logical for the courts to say that the exchange and the subsequent transfer are part of one and the same transaction, so that the transferor never actually owned the shares he later assigned.

A close examination of the facts surrounding the exchange in the present case makes it clear that the exchange of assets for stock and the subsequent transfer of a portion of that stock to Grant therein involved should not be considered part of the same transaction so as to deprive the associates of "control" immediately after the exchange. The facts are distinguishable from those existing in the Hazeltine and Bassick cases on three grounds. First, there was no written contract prior to the exchange binding the associates to transfer stock to the underwriters. At the most, there was an informal oral understanding of a general plan contemplating the organization of a new corporation, the exchange of assets for stock, and marketing of preferred stock of 1948 U.S. Tax Ct. LEXIS 81">*102 the new corporation to the public. A written contract providing for the transfer of shares from the associates to the underwriters did not come until five days after the exchange. Secondly, when the transfer of shares to the underwriters was embodied specifically in a formal contract, the underwriters received no absolute right to ownership of the common stock, but only when, as, and if, certain percentages of preferred stock were sold. How clearly contingent was the nature of their rights is illustrated by the fact that only one underwriter, Grant, met the terms of the agreement and became entitled to any shares. Thirdly, the necessity of placing the 300,000 shares in escrow with a bank is indicative of complete ownership of such stock by the associates following the exchange.

The standard required by the courts to enable them to say that a series of steps are interdependent and thus should be viewed as a single transaction do not exist here. It is true that all the steps may have been contemplated under the same general plan of May 1936; yet the contemplated arrangement for the sale of preferred stock to the public was entirely secondary and supplemental to the principal goal1948 U.S. Tax Ct. LEXIS 81">*103 of the plan -- to organize the new corporation and exchange its stock for the Austin assets. The understanding with the underwriters for disposing of the preferred stock, however important, was not a sine qua non in the general plan, without which no other step would have been taken. While the incorporation and exchange of assets would have been purposeless one without the other, yet both would 11 T.C. 397">*407 have been carried out even though the contemplated method of marketing the preferred stock might fail. The very fact that in the contracts of June 8, 1936, the associates retained the right to cancel the marketing order and, consequently the underwriters' means to own common stock issued to the associates, refutes the proposition that the legal relations resulting from the steps of organizing the corporation and transferring assets to it would have been fruitless without the sale of the preferred stock in the manner contemplated.

Finally, to say that the separate steps should be viewed as one transaction so that ownership of 87,900 shares never passed to the associates has the disadvantage of inferring that the interested parties intended to suspend ownership of 300,000 shares1948 U.S. Tax Ct. LEXIS 81">*104 from June 3, 1936, until such time as the underwriters definitely did or did not earn the right to such shares -- as it turned out, until October 1937. It is much more logical to say that ownership of all 300,000 shares rested in the associates until the conditions precedent had been fulfilled by the underwriters, and that when the associates turned over the stock to Grant they were exercising their rights of ownership acquired on June 3, 1936. To allow petitioner's contention is to permit a 15-month time lag after the exchange before determining "control immediately after the exchange." Such a proposition defeats the very language of the statute.

A review of decisions encountering this problem under section 112 (b) (5) shows that courts have determined control of the new corporation remained with the transferors of assets following the exchange under circumstances less favorable than in the present case.

In Federal Grain Corporation, 18 B. T. A. 242, the Board held that the fact that recipients of stock had, prior to the exchange of assets for stock, made an anticipatory agreement granting an option to purchase this stock to a third party, did not1948 U.S. Tax Ct. LEXIS 81">*105 shift ownership from the transferors of the assets. While the contractual arrangement of the underwriters of June 8, 1936, is similar to an option, yet they had only a contingent right, revocable by the grantors, and not an absolute right as in the Federal Grain case, supra, so that we have an even stronger ground for determining that control was acquired by the associates.

In Samuel Insull, Jr., 32 B. T. A. 47, 54, 55, prior to the organization of the new corporation, the future transferors of assets for stock of the corporation made an informal agreement to transfer a part of such shares to a third party in consideration of incorporation services to be rendered; the proposed assignment was to be absolute and unconditional; and the contract for the exchange of assets for stock made between the transferor and the new corporation embodied this contemplated assignment to a third party by the transferors. The Board stated:

11 T.C. 397">*408 * * * Upon the basis of this stipulation [concerning the informal agreement] the respondent contends that all of the steps contemplated in the exchange transaction were not completed until after Halsey, Stuart & Co. 1948 U.S. Tax Ct. LEXIS 81">*106 had acquired * * * the 57,000 shares of common stock.

Although the transactions above referred to were contemplated by the petitioners prior to the organization of Insull Utility Investments, Inc., it can not be said that they in any wise affected the exchange transaction by which the petitioners transferred securities to Insull Utility Investments, Inc., and received the issued preferred stock, first series, and all the common stock in exchange therefor. The petitioners received their shares of stock on January 11, 1929. The exchange transaction was completed on that date. The petitioners, with Martin J. Insull, were the owners of all the issued capital stock of Insull Utility Investments, Inc.

* * * *

* * * Clearly, "immediately after the exchange" the transferors were in control of Insull Utility Investments, Inc., and remained in control of it until after January 18, 1929. What happened on and after that date has no bearing upon the question in issue. * * *

In Schmieg, Hungate & Kotzian, Inc., 27 B. T. A. 337, 341, 342, an oral agreement was made between the partnership of Schmieg & Kotzian and one Hungate before the formation of the new corporation1948 U.S. Tax Ct. LEXIS 81">*107 and the exchange of assets for stock whereby the partners were to receive two-thirds of the common stock in exchange for their assets and Hungate was given an absolute right to one-third of the stock. The corporation was organized and the partners were issued all the stock except for qualifying shares. Hungate did not want any shares issued in his name at the time of the exchange because of pending litigation. Five years later Hungate's shares of common stock were assigned to him by Schmieg and Kotzian. The Board found that the ex-partners were in control of the new corporation immediately after the exchange, despite the unconditional prior oral agreement. The Board stated:

* * * we hold that, notwithstanding the verbal agreement which Hungate had with Schmieg and Kotzian in 1923 * * * the actual transaction which was put through in January, 1924, was a sale of the assets of the partnership to the newly organized corporation in consideration for the issuance of all the stock to Schmieg and Kotzian. They became the owners of the stock and were in control of the corporation, within the meaning of section 112 (j) of the Revenue Act of 1928. * * *

* * * When, after the sale of 1948 U.S. Tax Ct. LEXIS 81">*108 assets by the partnership to the corporation, the partners, Schmieg and Kotzian, who had received all the stock, transferred some of it to Hungate, they were merely exercising a right of ownership. * * *

Thus we conclude that in the present case the exchange of assets for stock between the associates and petitioner on June 3, 1936, was a separate completed transaction, distinct from the subsequent transfer of common stock to Grant, so that the associates were in control of petitioner immediately after the exchange within the provisions of section 112 (b) (5).

11 T.C. 397">*409 The second major prerequisite for a tax-free exchange under section 112 (b) (5) of the code, ⁴ is that the amount of stock or securities received by each of the transferors must be substantially in proportion to his interest in the property prior to the exchange. Where, as in the instant case, the transferee corporation received the transferred property subject to liabilities, then for the purpose of determining whether the amount of stock or securities received by each transferor is in the required proportion, the amount of such liability is considered as stock or securities received by such transferor. Sec. 1121948 U.S. Tax Ct. LEXIS 81">*109 (b) (5). 4 Therefore, the fact issue in the instant case becomes whether the shares of stock received by each associate from the corporation on June 3, 1936, including as stock the liabilities placed on the Austin assets, was substantially in proportion to his interest in the Austin assets and the $ 500 transferred to the corporation. We have already determined that the exchange transaction was completed on June 3, 1936, and we shall consider no stock transfers thereafter in deciding this issue.

1948 U.S. Tax Ct. LEXIS 81">*110 Each of the three associates had a proportionate interest in all the property transferred to petitioner; that is, the Austin assets and the $ 500 cash. The evidence shows that at the time of the exchange Martin Tow had a 46.25 per cent interest, R. S. Evans had a 46.25 per cent interest, and W. A. Ward, Jr., had a 7.50 per cent interest in the Austin assets. It can be presumed they held interests in the $ 500 cash in exactly the same ratio. Since the liabilities of $ 219,099.83 transferred in the exchange were on the Austin assets, owned in common by Tow, Evans, and Ward, each associate bore the burden of such liabilities in exactly the same proportion as his interest in such property.

By virtue of the exchange on June 3, 1936, each transferor received a portion of the 300,000 shares of common stock in the same ratio as his interest in the total property transferred. Tow received 138,750 shares or 46.25 per cent of the stock, Evans received 138,750 shares or 46.25 per cent, and Ward received 22,500 shares or 7.50 per cent. For the purpose of this statutory requirement, the $ 219,099.83 of liabilities 11 T.C. 397">*410 to which the transferred property was subject is considered as stock1948 U.S. Tax Ct. LEXIS 81">*111 received by the transferors, but such additional shares would also be distributed among the three associates in exactly the same ratio as their respective interests in the Austin assets, since this was the property encumbered by these liabilities. Therefore, the amount of stock acquired by each of the associates was substantially in proportion to his interest in the Austin assets and the $ 500 cash transferred to petitioner. Thus we conclude the transaction on June 3, 1936, was a tax-free exchange within the provisions of section 112 (b) (5) and resulted in no recognizable profit or loss.

What then is the basis for depreciation purposes of property acquired by a corporation by a tax-free exchange under section 112 (b) (5)? Section 113 (a) (8) of the code ⁵ specifically answers this question. The basis is the same as it would be in the hands of the transferor. In the instant case the basis of the Austin assets in the hands of the associates was the cost of those assets to them. They paid $ 5,000 cash and received the property subject to liabilities of $ 219,099.83. Thus the basis in their hands was $ 224,099.83. Therefore, the basis for the Austin assets to the petitioner 1948 U.S. Tax Ct. LEXIS 81">*112 is also $ 224,099.83, as contended by the respondent.

Decision will be entered under Rule 501948 U.S. Tax Ct. LEXIS 81">*113 .

Leech, J., concurring: In my judgment the various steps outlined in the majority opinion were integrated parts of a single plan rather than independent undertakings. The fact that the plan was not reduced to writing is unimportant, since it was carried out as orally agreed upon. The record, in my opinion, is insufficient to establish that the corporation agreed to pay or paid more for the assets it acquired than the price at which the transferors purchased them. Hence, the basis to the corporation would be the same as found by the majority. Therefore, I concur only in the result.