16 T.C. 607">*607 The Commissioner has determined deficiencies in the petitioner's tax for the years 1941 and 1942 as follows:

16 T.C. 607">*608 The primary issue in this proceeding is whether the basis to petitioner of the assets which it acquired from its predecessor corporation in 1922 is the cost of the properties to petitioner, or whether the basis of the assets to petitioner is the same as the basis of the assets in the hands of the transferor. The determination of the proper basis is necessary in order to compute the depreciation deductions, losses on sale and abandonment of property, and the excess profits credit based on equity invested capital to which petitioner was entitled for the years 1941 and 1942. The basis of the assets in question depends upon whether or not they were acquired by petitioner from its predecessor1951 U.S. Tax Ct. LEXIS 249">*251 corporation as the result of a tax-free reorganization within the meaning of section 202 of the Revenue Act of 1921. If it is held that the assets were not acquired as the result of a tax-free reorganization, the cost of the assets to the petitioner must also be determined. The respondent now agrees that the petitioner is entitled to an unused excess profits carry-over from 1940 to 1942. Other adjustments made by the respondent are no longer in dispute.

FINDINGS OF FACT.

The facts in this proceeding have been stipulated, and they are found as the parties have stipulated. The facts necessary for an understanding of the issues to be decided are as follows:

"1. Petitioner, American Wire Fabrics Corporation, is a corporation organized, in 1922 as hereinafter set forth, under the laws of the State of Delaware with principal office at No. 500 Fifth Avenue, New York, New York. Corporation income and declared value excess profits tax returns for the calendar years 1941 and 1942 were filed by petitioner with the Collector of Internal Revenue for the Third District of New York. * * *

"2. American Wire Fabrics Company (hereinafter referred to as "the Company") was organized under the laws1951 U.S. Tax Ct. LEXIS 249">*252 of the State of Iowa in 1911 and in the year 1922, prior to the transfer of its assets to petitioner as hereinafter set forth, was engaged in the business of manufacturing wire cloth, with one plant in Mount Wolf, Pennsylvania, and the other at Blue Island, Illinois. At that time, the Company had outstanding only 15,000 shares of one class of stock.

"3. Wickwire Spencer Steel Corporation (hereinafter referred to as "Wickwire") which was, during the period here involved, engaged in the manufacture of wire and steel products, was a corporation organized under the laws of the State of Massachusetts in 1919. It was formerly known as Clinton Wright Wire Company and in 1920, on the merger of Wickwire Steel Company into Clinton Wright Wire Company, the name of the latter was changed to Wickwire Spencer Steel Corporation.

16 T.C. 607">*609 "4. Sometime prior to August 24, 1922, George F. Naphen, doing business as a securities dealer in New York City and Boston, Massachusetts, under the name of Naphen & Co., secured options from all of the various stockholders of the Company to purchase their shares on or before September 30, 1922, at a price of $ 210 per share.

"5. On August 24, 1922, a meeting1951 U.S. Tax Ct. LEXIS 249">*253 of the Board of Directors of Wickwire was held at which an offer of Naphen & Co. to sell to Wickwire all of the capital stock of the American Wire Fabrics Corporation (of Delaware), a corporation to be formed for the purpose of acquiring the business and substantially all of the assets of the Company, was accepted, and Ward A. Wickwire, Vice President of Wickwire, was authorized and directed to accept said offer in the name and on behalf of Wickwire. * * *

"6. A contract embodying the terms of said offer as accepted was duly executed by Naphen and Wickwire on August 25, 1922. * * * [Under the contract, Naphen agreed to "organize a new corporation under the laws of Delaware and to make arrangements by which simultaneously with [its] purchase" of the outstanding capital stock of the Company, petitioner would acquire all of the assets of the Company and assume all of its liabilities in exchange for 20,000 shares of its capital stock and mortgage notes with a fair market value of $ 1,350.000. It was also agreed that Wickwire would purchase the 20,000 shares of stock to be issued by petitioner for $ 777,500 in cash and notes of Wickwire which had a fair market value of $ 1,597,500.]

1951 U.S. Tax Ct. LEXIS 249">*254 "7. The action taken by the Board of Directors of Wickwire on August 24, 1922, was ratified, approved and confirmed by the stockholders of Wickwire at a meeting held on September 8, 1922.

"8. In accordance with the agreement dated August 25, 1922, petitioner was incorporated under the laws of the State of Delaware on September 2, 1922. On September 16, 1922, a special meeting of the stockholders of petitioner was held, at which time the stockholders voted to authorize petitioner through its officers to offer to acquire all the properties and assets of the Company, for cash in the sum of $ 1,350,000, 20,000 shares of stock of petitioner, and the assumption of liabilities of the Company. * * *

"9. On September 20, 1922, a regular annual meeting of the stockholders of the Company was held at which acceptance of the offer of petitioner to acquire all of the property and assets of the Company, real, personal and mixed, as set forth in said offer dated September 16, 1922, was authorized. * * * The offer of petitioner [made on September 16, 1922] was formally accepted by the Company, through its president on September 27, 1922. [The resulting contract between petitioner and the Company1951 U.S. Tax Ct. LEXIS 249">*255 provided that petitioner would purchase all of the assets of the Company and assume all of its liabilities in exchange for $ 1,350,000 in cash and the delivery of all the capital stock 16 T.C. 607">*610 of petitioner in the amount of 20,000 shares. It order to facilitate the necessary financing of the purchase by Naphen & Co. of the outstanding capital stock of the Company, the contract also provided that the consideration of $ 1,350,000 in cash and 20,000 shares of its capital stock to be paid by petitioner should be paid directly to Naphen & Co. concurrently with the purchase by Naphen & Co. of the outstanding shares of stock of the Company.]

"10. The consent of Naphen & Co. to the transfer of assets to petitioner by the Company required by the stockholders was given on September 27, 1922. * * *

"11. Pursuant to the terms of the agreement between petitioner and the Company for the acquisition of the latter's assets, on September 27, 1922, the petitioner issued 20,000 shares of its stock to Naphen & Co. and paid over $ 1,350,000 in cash to said firm. [The cash was raised by the sale by petitioner of $ 1,500,000 face value bonds to E. H. Rollins & Sons at 90.]

"12. On September 28, 1922, 1951 U.S. Tax Ct. LEXIS 249">*256 Naphen & Co. pursuant to its contract with Wickwire dated August 25, 1922, and against receipt from Wickwire of $ 777,500 in cash and Wickwire's Ten Year 7 1/2% Secured Convertible Gold Notes in the principal amount of $ 1,775,000, delivered the 20,000 shares of petitioner's stock to Wickwire by transferring said shares to Columbia Trust Company, to be held by it as Trustee as collateral under an Indenture of Trust made by Wickwire securing said Notes. A contract between Wickwire and a group of underwriters providing for the sale of the Notes at 90 was also assigned to Naphen & Co. The Notes were thereupon sold and Naphen & Co. received the net proceeds of $ 1,597,500. * * *

"13. From the cash received by Naphen as hereinabove set forth in paragraphs 11 and 12, Naphen paid the old stockholders of the Company $ 3,150,000 for their 15,000 shares of stock. The old stockholders had no interest in either the petitioner or Wickwire at any time.

"14. Thereafter, pursuant to the contract previously entered into between the parties, the Company transferred its assets to the petitioner and was subsequently dissolved.

"15. In its returns as filed for the years 1941 and 1942 petitioner based1951 U.S. Tax Ct. LEXIS 249">*257 its deductions for depreciation and its deduction for losses on the sale and abandonment of machinery and equipment on the theory that the basis of its properties was cost determined under section 113 (a) of the Internal Revenue Code. For excess profits tax purposes in these same two years petitioner computed its equity invested capital on the same theory.

"16. On the other hand, the respondent based his computations of depreciation, loss on sale and abandonment of property on the theory that the basis of petitioner's property was16 T.C. 607">*611 governed by sections 113 (a)(7), 113 (a) (8), 113 (a) (12) or 113 (a) (16) of the Internal Revenue Code and that the assets acquired by petitioner from the Company had a substituted basis, that is the basis in the hands of the Company, rather than cost to petitioner.

"17. The final balance sheet of the Company as of September 30, 1922, was as follows:

1951 U.S. Tax Ct. LEXIS 249">*258 "18. The opening balance sheet of the petitioner as of October 1, 1922, was as follows:

Ultimate Findings of Fact.

The series of steps, as a result of which Wickwire ultimately acquired control of the assets of the Company, were integral parts of a single indivisible transaction. Before the series of interdependent steps were entered into, the stockholders of the Company were in control of its assets. After the completion of the various steps, Wickwire was in control of the assets.

The transaction between Wickwire and Naphen & Co., whereby Wickwire acquired ownership of the 20,000 shares of petitioner's stock, was an arm's length transaction.

The1951 U.S. Tax Ct. LEXIS 249">*259 fair market value of 20,000 shares of petitioner's stock at the time they were transferred as part of the consideration paid by petitioner for the assets of the Company was $ 2,375,000. The total cost to petitioner of the assets which it acquired from the Company was $ 3,953,887.47.

16 T.C. 607">*612 OPINION.

The primary issue in this proceeding is whether the basis to petitioner of the assets which it acquired from its predecessor corporation in 1922 is the cost of the properties to petitioner, or whether the basis of the assets to petitioner is the same as the basis of the assets in the hands of the transferor. The determination of the proper basis is necessary in order to compute the depreciation deductions, losses on sale and abandonment of property, and the excess profits credit based on equity invested capital to which petitioner was entitled for the years 1941 and 1942. The basis of the assets in question depends upon whether or not they were acquired by petitioner from its predecessor corporation as the result of a tax-free reorganization within the meaning of section 202 of the Revenue Act of 1921. ¹1951 U.S. Tax Ct. LEXIS 249">*261 If, as petitioner contends, the assets were not acquired as the result of such1951 U.S. Tax Ct. LEXIS 249">*260 a reorganization, the basis of the property to petitioner is the amount which petitioner paid for the assets. Section 113 (a) provides that the basis of property is the cost of such property unless one of the exceptions listed in the section applies. On the other hand, if respondent's contention is correct and the assets were acquired by petitioner as the result of a tax-free reorganization, the exceptions of either section 113 (a) (7) or section 113 (a) (12)² apply; and the basis of the assets to petitioner is the same as the basis of the assets in the hands of the transferor.

1951 U.S. Tax Ct. LEXIS 249">*262 16 T.C. 607">*613 The respondent bases his position on the contention that Wickwire first acquired ownership of the stock of the Company and that petitioner subsequently acquired ownership of the assets of the Company in an independent transaction as a result of which Wickwire received control of petitioner. He contends that Naphen & Co. was acting as the agent of Wickwire throughout the series of transactions and that the securing by Naphen & Co., as agent for Wickwire, of options to purchase the stock of the Company from its shareholders constituted ownership of the stock in Wickwire.

The petitioner contends, however, that the continuity of control necessary for a tax-free reorganization to have been effected is lacking. It contends that each of the transactions involved in this proceeding was merely a step in a series of integrated transactions which had as their purpose the ultimate transfer of control of the assets of the Company from the stockholders of the Company to Wickwire as sole stockholder of petitioner. We believe that petitioner's contention is correct and that the formation of petitioner and the acquisition by it of the assets of the Company were an essential step in an1951 U.S. Tax Ct. LEXIS 249">*263 over-all plan, rather than an independent transaction which followed the securing by Wickwire of ownership of the stock of the Company. The test to be applied in order to determine whether a particular transaction is complete in itself or whether it is merely a step in a series of integrated transactions or, put another way, whether a series of steps should be treated as a single, indivisible transaction or should retain their separate entity is whether the various steps were "so interdependent that the legal relations created by one transaction would have been fruitless without the completion of the series." American Bantam Car Co., 11 T.C. 397, affd., 177 Fed. (2d) 513. See also, ACF-Brill Motors Co., 14 T.C. 263, Independent Oil Co., 6 T.C. 194; Spang, Chalfant & Co., 31 B. T. A. 721; Paul, Selected Studies in Federal Taxation, 2d Series, pp. 200-254. Applying this test to the facts before us, we are convinced that the various steps were part of an integrated transaction, rather than several independent transactions, and that1951 U.S. Tax Ct. LEXIS 249">*264 the legal rights, powers, and duties resulting 16 T.C. 607">*614 from one of the transactions would have been ineffectual without the completion of the other mutually interdependent steps. So viewed, the stockholders of the Company were in control of the transferor corporation before the transaction and Wickwire was in control of the transferee corporation immediately thereafter. Since the original stockholders were various individuals who had no interest in Wickwire, the continuity of control required to constitute a transaction a tax-free reorganization was not present.

The intention of the parties was that petitioner should be incorporated to take over the assets and operations of the Company. This is evidenced by the contract between Naphen & Co. and Wickwire which provided for the organization of petitioner by Naphen & Co. and the subsequent acquisition by petitioner of the assets of the Company in exchange for an agreed-upon consideration. Naphen & Co. and Wickwire also agreed that the stock which petitioner was to transfer to Naphen & Co. was to be transferred by Naphen & Co. to Wickwire. These were all integrated steps designed to accomplish the ultimate result. Lacking any 1951 U.S. Tax Ct. LEXIS 249">*265 one of the steps, none of the others would have been made; the various steps were so interlocked and interdependent that a separation of them, as is suggested by respondent, would defeat the purpose of each and the expressed intention evidenced by the agreement between Wickwire and Naphen & Co.

Even if we agreed with respondent that Naphen & Co. was merely acting as Wickwire's agent throughout the transactions and that the acquisition by Naphen & Co. of the options to purchase the Company's stock was equivalent to the acquisition of such options by Wickwire, we can not take the further step requested by respondent and conclude that the acquisition of options to purchase stock is equivalent to ownership of the stock optioned. Manifestly, actual exercise of the options and purchase of the stock is necessary to obtain ownership. This essential step was not taken until after the formation of petitioner, and, concurrently with it, petitioner acquired ownership of the assets from the Company by delivering $ 1,350,000 plus 20,000 shares of its stock to Naphen & Co., after which Naphen & Co. paid $ 3,150,000 to the stockholders of the Company for their shares pursuant to the option agreements. 1951 U.S. Tax Ct. LEXIS 249">*266 The consideration for the assets was paid by petitioner to Naphen & Co. pursuant to the contract entered into between petitioner and the Company in order to facilitate the payments by Naphen & Co. to the stockholders of the Company for their stock. Whether the options were obtained and exercised by Naphen & Co. as Wickwire's agent or for its own account, no means of exercising the options were provided until the basic agreement with Wickwire was executed on August 24, 1922. As a result of this agreement the obligation of Wickwire to conclude the transactions became certain and the formation of petitioner was assured. 16 T.C. 607">*615 And only after the organization of petitioner was it possible for Naphen & Co. to acquire the necessary funds with which to exercise the options previously obtained, either for itself or as Wickwire's agent. A unified plan was thus perfected under which Wickwire acquired control of the transferred assets when that control was relinquished by the stockholders of the Company. That ultimate point was reached when Wickwire paid Naphen & Co. for the 20,000 shares of stock of petitioner. Before that time, the stockholders of the Company were in control of its1951 U.S. Tax Ct. LEXIS 249">*267 assets. After the completion of the interdependent, correlated transactions, Wickwire, which had no relation to the stockholders of the Company, was in control of the transferred assets. The continuity of control necessary to effect a tax-free reorganization, therefore, was lacking. See Schumacher Wall Board Corporation, 33 B. T. A. 1211, affd., 93 Fed. (2d) 79.

It is held that the assets which petitioner acquired in 1922 from its predecessor corporation were not acquired as the result of a tax-free reorganization. The exceptions to a cost basis found in sections 113 (a) (7) and 113 (a) (12), therefore, do not apply, and the basis to petitioner of the properties so acquired is the amount which petitioner paid for the assets.

There remains the question of the cost to petitioner of the assets which it acquired from its predecessor corporation. Both parties agree that petitioner paid $ 1,350,000 in cash, assumed $ 228,887.47 in liabilities, and transferred 20,000 shares of its stock in exchange for the assets. The only dispute between the parties relates to the fair market value of the 20,000 shares of stock transferred.

1951 U.S. Tax Ct. LEXIS 249">*268 Respondent contends that the fair market value of the stock transferred was only $ 1,800,000. He arrives at this figure by assuming that the fair market value of the Company in 1922 was the amount which Naphen & Co. paid to the individual holders of the 15,000 shares of stock of the Company, or $ 3,150,000. From this amount of $ 3,150,000 respondent has deducted the $ 1,350,000 in cash paid by petitioner, leaving the difference of $ 1,800,000 to represent the fair market value of petitioner's stock. We do not believe, however, that the fair market value of petitioner's stock can be computed in this way. The error in such method of computation is that it is based on a valuation of the Company's stock to the holders thereof rather than on a valuation of petitioner's stock. There is not sufficient relationship between the two to justify such a procedure. We are not concerned with the determination of the amount received by the Company's stockholders from the sale of their shares of stock, but rather with the fair market value of petitioner's stock. The best evidence of such value is the price actually paid for the shares in question in an arm's length transaction between Wickwire1951 U.S. Tax Ct. LEXIS 249">*269 and Naphen & Co. In a similar situation in Commissioner 16 T.C. 607">*616 v. Schumacher Wall Board Corporation, supra, the court said:

The Commissioner is in error. The cost of an article to a person is what the person pays for the same. The Commissioner asserts that if all these sales and transfers were part and parcel of the same general transaction, then whatever the Schumacher individuals, stockholders of the old corporation, received for the assets should be the cost of the assets to the new corporation. The argument is specious. Whether there was one transaction or many, the new corporation taxpayer paid a definite amount for its assets. The amount it paid is obviously the cost to it of those assets. The fact that some of the quid pro quo went to promoter Hunter, Dulin & Co., instead of to the former owners of the assets, has nothing to do with what the assets cost the taxpayer. (93 Fed. (2d) at 82.)

See, also, Hazeltine Corporation, 32 B. T. A. 110, affd. on this point, 89 Fed. (2d) 513.

The difference between the value contended for by petitioner and that contended for by respondent1951 U.S. Tax Ct. LEXIS 249">*270 represents that portion of the purchase price of the stock which was retained by the promoter, Naphen & Co., as a legitimate profit for its part in the series of transactions, including the assembling of 100 per cent ownership in the Company. The fact that this amount was retained by Naphen & Co. rather than paid to the various holders of small lots of the Company's stock does not decrease the fair market value of petitioner's stock. It is held that the fair market value of the 20,000 shares of petitioner's stock was the purchase price paid by Wickwire to Naphen & Co., or $ 2,375,000, and that the total cost of the assets acquired by petitioner from the Company was $ 3,953,887.47.

A check on this valuation is available from a consideration of the various integrated steps in the transaction by which Wickwire acquired 100 per cent ownership of petitioner, which had acquired complete ownership of the assets in question. The net result of the interdependent steps was that Wickwire and petitioner, its wholly-owned subsidiary, together paid out cash in the amount of $ 2,127,500, transferred notes which had a fair market value of $ 1,597,500, and assumed liabilities in the amount of $ 1951 U.S. Tax Ct. LEXIS 249">*271 228,887.47. In exchange for these items which totaled $ 3,953,887.47, the assets in question were received.

Decision will be entered under Rule 50.