20 T.C. 405">*405 Respondent determined a deficiency of $ 70,590.74 in petitioner's income tax liability for the fiscal year ended September 30, 1947. Petitioner has conceded certain adjustments. The sole remaining question is whether petitioner's application of previously acquired Canadian currency, which had appreciated in value since its original acquisition, to consummate the purchase of the capital stock of a Canadian corporation resulted in an independently taxable gain, realized in Canada, apart from any gain realized on the subsequent sale of that stock.

FINDINGS OF FACT.

Most of the facts have been stipulated and are found accordingly.

Petitioner is a corporation organized under the laws of the State of Delaware. Its principal business office is located in1953 U.S. Tax Ct. LEXIS 152">*153 Los Angeles, California. A Federal income tax return for the fiscal year ended September 30, 1947, was filed on its behalf on the accrual basis with the collector for the sixth district of California.

Petitioner is engaged in the small loan business. This business consists of making secured and unsecured loans, usually to individuals. During the period here in question the average loan made by petitioner was $ 310.

20 T.C. 405">*406 In 1946 Campbell Finance Corporation Limited, hereinafter called Campbell, was a corporation organized and existing under the laws of the Province of Ontario, Dominion of Canada. It was then engaged in the small loan business in Canada, operating approximately 50 offices, with aggregate loans outstanding as of March 31, 1946, of approximately $ 5,965,802 (Canadian).

In January 1946 Campbell had 50,000 shares of common stock being the only issued and outstanding shares of stock of the corporation. On and immediately prior to January 2, 1946, all of these shares were owned by Industrial Acceptance Corporation Limited, a Canadian corporation, hereinafter called Industrial.

Industrial's principal business is, and was, except for its ownership of Campbell stock, 1953 U.S. Tax Ct. LEXIS 152">*154 the discounting of commercial installment paper for Canadian dealers in automobiles, furniture, farm implements, and other property. It was not actively engaged in the small loan business as such except through its ownership of the Campbell stock. Industrial had acquired all of the Campbell stock in 1940, holding it until the end of World War II as a means of compensating for the decrease in its regular business of discounting paper, the latter business having declined during the war period because of shortage of automobiles and other equipment.

In about December 1945, W. A. Thompson, who was then president of petitioner and who was, at the time of the hearing, the chairman of the board of directors of petitioner, was advised that Industrial desired to sell the 50,000 Campbell shares. In January or February 1946, Thompson, Paul A. Appleby, who was then vice president of petitioner, and Frederick N. Towers, petitioner's general counsel, went to Montreal, Canada, to discuss with officials of Industrial a possible acquisition of the Campbell stock.

At that time the officers of Industrial offered to sell the Campbell stock to petitioner for a price equal to the net worth of Campbell, 1953 U.S. Tax Ct. LEXIS 152">*155 according to its books, plus $ 1,000,000. In terms of Canadian dollars, Industrial's asking price for the Campbell stock was $ 2,214,969.94.

Except through utilization of the method ultimately included in the purchase agreement, petitioner did not have sufficient cash resources, either in capital or ability to borrow, to meet Industrial's asking price in cash. Except through utilization of the method ultimately used in the purchase agreement, it could not pay the cash price and still have funds available with which to finance the operations of Campbell. The officers of petitioner discussed a proposal from which emerged the concrete offer made to Industrial on March 27, 1946. On that date petitioner and Industrial entered into a written agreement substantially incorporating petitioner's proposal, and providing in part as follows:

20 T.C. 405">*407 The provisions of this Agreement * * * were in contemplation of the parties hereto on January 2, 1946, and it is therefore the intention of said parties that this agreement shall be and become effective as of said date.

Seller [Industrial], with all convenient speed following the execution of this agreement, will transfer and deliver to Purchaser1953 U.S. Tax Ct. LEXIS 152">*156 [petitioner] 50,000 shares of the authorized, issued and fully paid common stock of Campbell Finance Corporation Limited, an Ontario Corporation (sometimes hereinafter referred to as "Campbell"), and Purchaser will contemporaneously cause to be lawfully issued to Seller and delivered to the Canadian Bank of Commerce, in escrow, 100,000 shares of its presently authorized common stock.

* * * *

Purchaser will proceed with all convenient speed with the preparation and submission to the Securities and Exchange Commission of the United States of a registration statement covering the said 100,000 shares issued by Purchaser to Seller under the terms of this Agreement. Purchaser reserves unto itself the right, in its sole discretion, to register with said Securities and Exchange Commission other and additional of its securities contemporaneously with the registration of the shares so delivered to Seller. Such registration is to be at the sole expense, cost and risk of the Purchaser, and the Seller shall not be held responsible for any act or omission with reference thereto, except to the extent that should any factual data contained in said registration statement be furnished to Purchaser1953 U.S. Tax Ct. LEXIS 152">*157 by Seller, Purchaser may accept the same as being true and accurate in all respects.

Purchaser shall effect appropriate arrangements with investment bankers to be selected by it for the sale to said investment bankers of the shares so issued by Purchaser to Seller, together with such additional shares (if any) as may be required to carry out the undertaking of the Purchaser hereunder, and from the proceeds of such sale Seller shall be entitled to have, receive and retain the sum of $ 2,214,969.94. If on the sale to said investment bankers of the said 100,000 shares of common stock as above provided, the net proceeds of such sale actually received in cash by the Seller shall not equal or exceed the sum of $ 2,214,969.94, Purchaser undertakes to make good to the Seller any deficiency in said amount through either or both of the following media, namely:

(a) by issue and delivery to Seller of additional shares of the common stock of Purchaser for sale to said investment bankers as hereinabove already contemplated, with the right to Seller to have and receive the net proceeds of sale thereof to the extent necessary to make good any deficiency as aforesaid; or

(b) to pay to the Seller1953 U.S. Tax Ct. LEXIS 152">*158 the amount in cash equal to such deficiency.

The Purchaser further undertakes to indemnify and save harmless the Seller in respect of any and all cost and/or expense to the Seller by way of transfer taxes and/or otherwise in connection with the transfer and delivery of the 100,000 shares by the Seller to investment bankers for purposes of sale of said shares by the latter as above provided.

In the event of the net proceeds of sale of said 100,000 shares to the investment bankers being in excess of $ 2,214,969.94, then Seller will instruct and direct said investment bankers to pay over and distribute such excess to Purchaser.

In conformity with the requirements of the Securities Act, 1933, of the United States of America, and the regulations pursuant thereto, Seller and Purchaser agree that the said 100,000 shares of the common stock of Purchaser shall be held by the Canadian Bank of Commerce, in escrow, for the following purposes, namely:

(a) To deliver said 100,000 shares of the common stock of Purchaser to said investment bankers, as hereinabove provided, upon receipt from Purchaser, 20 T.C. 405">*408 at any time prior to November 30th, 1946, of a certificate to the effect that a registration1953 U.S. Tax Ct. LEXIS 152">*159 statement concerning the said 100,000 shares has been duly filed with the Securities and Exchange Commission of the United States of America and that said registration has become effective, and upon receipt from Seller of written authorization to make such delivery; or

(b) To deliver said 100,000 shares to Purchaser at any time upon receipt of written instructions to that effect from both Seller and Purchaser; or

(c) To deliver said 100,000 shares to Seller at any time subsequently to November 30th, 1946, upon written instructions to that effect from Seller.

In the event of delivery of said 100,000 shares to Seller as next hereinabove contemplated, Seller covenants that it will not offer the whole or any part of said shares for sale in the United States of America without first complying with all requirements of said Securities Act, 1933.

Pending ultimate receipt by Seller of the sum of $ 2,214,969.94 as provided in this agreement, Purchaser recognizes that Seller is entitled to reasonable compensation for delayed receipt by Seller of said amount. The parties therefore agree that a proper admeasurement of such compensation shall be interest upon the said $ 2,214,969.94 from January1953 U.S. Tax Ct. LEXIS 152">*160 2nd, 1946, to date of receipt of said full amount by Seller at the rate of 4 1/2 per centum per annum. Against the amount of such compensation, however, Seller shall credit any and all net proceeds by way of dividends that may be actually received by Seller upon the said 100,000 shares delivered to Seller under the terms hereof.

So long as the said 100,000 shares of the common stock of Purchaser have not been sold to said investment bankers, as hereinbefore contemplated, and provided that Purchaser has not sold or disposed of the whole or any part of said 50,000 shares of Campbell (with the exception of the seven shares thereof required under the terms hereof to be transferred and delivered to the nominees of Seller), then Purchaser may, at any time prior to November 30th, 1946, repurchase the said 100,000 shares from Seller for and in consideration of the transfer and delivery by Purchaser to Seller of said 50,000 shares of Campbell and the payment to Seller of the sum of $ 100,000.00 together with a further sum equal to the actual damage, if any, caused to Campbell by reason of any acts of Purchaser. Notice of the intention of Purchaser to repurchase the said shares of the common1953 U.S. Tax Ct. LEXIS 152">*161 stock of Purchaser shall be given by registered letter addressed to Seller and delivered to the Executive Offices of Seller in the Sun Life Building, Montreal, at any time up to and including the 30th day of November, 1946. Following said notice Purchaser shall transfer and deliver to Seller said 50,000 shares of Campbell and shall pay to Seller said sum of $ 100,000.00 at said Executive Offices of Seller not later than twenty (20) days following the date of delivery of said notice, and Seller shall thereupon instruct the Canadian Bank of Commerce to deliver to Purchaser said 100,000 shares of the common stock of Purchaser. The amount of actual damages, if any, caused to Campbell by reason of any acts of Purchaser shall thereafter be ascertained and, if there is no agreement thereon or agreed settlement thereof, the matter shall be submitted to the arbitration of some person to be chosen by Seller and Purchaser, or, if they cannot agree on one person, then to two persons, one to be chosen by Seller and the other by Purchaser, and a third to be appointed by the two persons first chosen, or, on their failing to agree, then by a Judge of the Superior Court for the District of Montreal. 1953 U.S. Tax Ct. LEXIS 152">*162 The award shall be conclusive as to the amount of the damage, and shall be payable within fifteen (15) days of the date thereof. If the full amount of the claim for damages is awarded, the costs shall follow the event, and, in other cases, all questions of costs shall be in the discretion of the arbitrators.

20 T.C. 405">*409 If on or before November 30th, 1946, Purchaser has not given notice to Seller of Purchaser's intention to repurchase from Seller the said 100,000 shares of the common stock of Purchaser and Seller shall not have received full payment of the sum of $ 2,214,969.94 hereinbefore referred to, together with compensation for delay in receipt thereof as herein provided, Purchaser shall thereafter be in default and Seller shall thereupon be entitled to demand and to have and receive from Purchaser any balance still unpaid to Seller of the said sum of $ 2,214,969.94, together with compensation for delay in receipt thereof as aforesaid.

To protect and indemnify Seller against any loss that might or could arise or result from Purchaser's election to repurchase its said shares, as above provided, and/or from Purchaser's default as defined in the paragraph next hereinabove, Purchaser1953 U.S. Tax Ct. LEXIS 152">*163 agrees to deposit with Seller as cash collateral security concurrently with the transfer and delivery of said 50,000 shares of Campbell as hereinbefore provided, the sum of $ 2,200,000.00 and Seller agrees that it will credit to the account of Purchaser interest at the rate of 4 1/2 per centum per annum on said amount or any part thereof for the period during which said amount or part thereof so remains on deposit as cash collateral security with Seller.

Should the proceeds of the sale of said 100,000 shares of the common stock of Purchaser to the investment bankers, as hereinabove provided, be not delivered to Seller, or be insufficient when delivered to Seller to equal or exceed the sum of $ 2,214,969.94 together with compensation for delay in receipt thereof as herein provided, or should Purchaser notify Seller of Purchaser's intention to repurchase from Seller the said 100,000 shares of the common stock of Purchaser as above provided upon payment to Seller of said sum of $ 100,000.00 and together with a further sum equal to the damages, if any, as aforesaid, then Seller may, to the extent that any amount due to Seller hereunder has not been paid, take, have and retain from the1953 U.S. Tax Ct. LEXIS 152">*164 said sum of $ 2,200,000.00 so deposited by Purchaser as cash collateral security with Seller an amount sufficient fully to pay to Seller all amounts due to Seller hereunder, and the balance, if any, of said sum so deposited shall thereafter be returned by Seller to Purchaser, with interest as aforesaid. In the event of Seller being in possession or in control of any of the said 100,000 shares or of any proceeds of sale of any thereof after ultimate receipt by Seller of the above-mentioned sum of $ 2,214,969.94 and compensation for delay in payment thereof, as above provided, then Seller will account to Purchaser in respect of any of said shares or proceeds of sale as aforesaid so still in Seller's possession or under its control.

Pending ultimate receipt by Seller of the said sum of $ 2,214,969.94, Purchaser covenants and agrees that it will not sell or otherwise dispose of said 50,000 shares of Campbell and that Purchaser will give to Seller, or to Seller's nominees, a proxy to permit Seller, or said nominees, to vote said common shares of Campbell at all meetings of shareholders of Campbell and that Purchaser will transfer and deliver to nominees of Seller seven (7) shares of Campbell1953 U.S. Tax Ct. LEXIS 152">*165 to qualify said nominees to act as directors of Campbell. Seller covenants and agrees that it will procure for Purchaser the resignations of all of said nominees of Seller as directors of Campbell upon receipt of said sum of $ 2,214,969.94. Purchaser further covenants and agrees that pending ultimate receipt of said sum there will be no changes in the management of Campbell without the consent of Seller and that the bookkeeping system of Campbell and the fees paid by Campbell to Seller for the use of Seller's bookkeeping machinery shall continue as presently constituted.

* * * *

20 T.C. 405">*410 It is specifically understood and agreed by and between the parties to this Agreement that in each and every instance in which the payment, deposit, exchange, adjustment or distribution of money is involved under the terms hereof, such payment, deposit, exchange, adjustment or distribution shall be in Canadian funds in the City of Montreal, excepting only in the event of the sale of shares to the investment bankers, as hereinbefore provided, resulting in an excess over and above the amount to which Seller is entitled, then such excess shall belong and shall be payable to Purchaser by the investment1953 U.S. Tax Ct. LEXIS 152">*166 bankers in whatever funds or currency such excess may then be.

* * * *

Petitioner would have preferred to have made a cash offer for the Campbell stock in an amount substantially less than Industrial's asking price. The acquisition of the Campbell stock by the method set forth in the above contract was necessary in order to meet Industrial's demand that payment of the purchase price be made in cash.

The funds required by petitioner in order to carry on its activities have been derived from three sources: (a) equity capital, consisting of preferred and common stock; (b) bonds or debentures; and (c) money borrowed from banks. In 1946 the banks with which petitioner did business limited the total amount of unsecured loans to petitioner at any time to twice petitioner's equity capital, including as equity capital for this purpose all subordinated obligations.

The following table discloses the ratios between petitioner's equity capital, including subordinated obligations, and loans from banks as of the dates indicated:

Petitioner believed that its common stock would appreciate in value as soon as the public received information that the Campbell stock had been acquired.

During the year 1946, the common stock of petitioner was not listed on any national securities exchange. It was, however, traded in the over-the-counter market. The over-the-counter quotations on the common stock of petitioner on the various dates indicated were as follows: 20 T.C. 405">*411

1953 U.S. Tax Ct. LEXIS 152">*168 At the time that the negotiations for acquisition of the Campbell stock were being carried on, petitioner had a line of credit with the Bank of the Manhattan Company in the amount of $ 2,000,000 (United States). Said bank was willing to loan that amount to petitioner for use in connection with the agreement between petitioner and Industrial of March 27, 1946.

On March 27, 1946, petitioner, through its stock transfer agent in New York City, issued, as an original issue, 100,000 shares of its common stock in the name of Industrial, and caused the same to be delivered to the Canadian Bank of Commerce, to be held in escrow. From and after said date of issuance, Industrial appeared on the stock transfer records and on the share register of petitioner as the owner of 100,000 shares of common stock of petitioner.

On January 28, 1946, prior to the issuance of the 100,000 shares of petitioner's stock to Industrial, petitioner's counsel sent a letter to the Securities and Exchange Commission which read, in part, as follows:

The Company [petitioner] is contemplating an expansion program, divided into two parts * * *

The Company believes it will be enabled to purchase a Canadian finance company1953 U.S. Tax Ct. LEXIS 152">*169 on the basis of issuing in payment therefore [sic] certain shares of its common stock on condition that it will guarantee to the seller that it can find a purchaser to distribute the stock to the public within the next seven or eight months. Obviously, under such state of facts, I do not believe the seller, in taking such shares, can be considered to take them for investment but for the purpose eventually of making a public distribution thereof and I think, therefore, registration will be required and have so advised the Seaboard people. The question presented is whether or not there would be a violation of the law if Seaboard were to issue those shares to the seller at this time. In this connection, I have advised Seaboard that, in agreeing to issue the shares, they should insist that the shares be deposited in escrow with a bank, to remain escrowed until such time as a registration statement is in effect, else the shares being in the hands of the seller he might undertake to distribute them irrespective of commitment and before the registration were effected.

The second part of the financing contemplates the sale of shares through an underwriter some time during the summer1953 U.S. Tax Ct. LEXIS 152">*170 for the purpose of providing additional capital to Seaboard. Obviously, therefore, it is Seaboard's intention to register both blocks of stock at the same time, thus saving expenses 20 T.C. 405">*412 of registration. The seller is not objecting to the fact the shares he will receive are not now free for sale. He is satisfied to wait the necessary six or seven months, so the real issue involved is the issuance of stock in payment for the property to be purchased plus the undertaking on the part of Seaboard to find a purchaser for that stock and an underwriter to do a public offering, with probably a dollar and cent contingent commitment in the event of nonperformance.

* * * *

Unless the transaction is handled in the form of the issuance of stock in payment for the property, Seaboard will be required to issue a note or other paper obligation, which must show up on its balance sheet as a quick liability. This would somewhat defeat the purpose of the transaction, whereas the issuance of stock with a contingent liability only to find an underwriter would not adversely affect the Company's balance sheet.

On February 6, 1946, a member of counsel for the Securities and Exchange Commission, replied1953 U.S. Tax Ct. LEXIS 152">*171 to petitioner's counsel in part as follows:

The issuance of stock in connection with the acquisition of the Canadian company and the offering of securities for the purpose of raising additional capital appear to be a part of a general plan for the company's financing. If the shares to be issued to the Canadian company will be accompanied by appropriate restrictions preventing any distribution thereof prior to the effective date of the registration statement, I should not be inclined to raise any objection to the postponement of registration until such time as the offering to the public will occur. * * *

On March 27, 1946, Industrial caused to be transferred and delivered to petitioner a certificate or certificates evidencing 50,000 shares of the common stock of Campbell. From and after that date, and until petitioner sold the Campbell stock, petitioner appeared on the stock transfer records and the share register of Campbell as the owner of 50,000 shares which constituted all of Campbell's capital stock.

On or about March 30, 1946, petitioner issued its check to the Canadian Bank of Commerce in the amount of 2 million United States dollars, with instructions to buy $ 2,200,000 1953 U.S. Tax Ct. LEXIS 152">*172 in Canadian dollars for petitioner's account. Canadian dollars in the required amount were purchased for petitioner's account and deposited with Industrial pursuant to their agreement of March 27, 1946. Industrial duly acknowledged receipt of the deposit. The 2 million United States dollars were borrowed by petitioner from the Bank of the Manhattan Company.

In acknowledging receipt of petitioner's check drawn on the Bank of the Manhattan Company, the letter from the Canadian Bank of Commerce said in part:

We have received [from Industrial] a receipt for $ 2,200,000 Canadian funds and certificates duly endorsed representing 50,000 shares of common stock of Campbell Finance Corporation Limited. We record that under the instructions contained in your letter these certificates are to be held until we receive from 20 T.C. 405">*413 you 100,000 shares Seaboard Finance common stock, after which the 50,000 shares of Campbell Finance Corporation stock are to be forwarded to you by registered mail.

On or about May 4, 1946, petitioner commenced the preparation of a registration statement for filing with the Securities and Exchange Commission in Washington, D. C. This statement was filed on August1953 U.S. Tax Ct. LEXIS 152">*173 29, 1946, and became effective on November 22, 1946. It registered 50,000 shares of series A cumulative preferred stock and 200,000 shares of common stock. The prospectus which was prepared and filed as part of the registration statement stated, in part:

Under the terms of the agreement of purchase and sale, * * *, [petitioner] in payment for all the 50,000 outstanding shares of Common Stock of Campbell, has issued 100,000 shares of its Common Stock, which have been deposited in escrow with the Canadian Bank of Commerce pending the completion of arrangements by * * * [petitioner] with investment bankers for the public sale of said 100,000 shares of Common Stock for the account of Industrial and the registration thereof under the Securities Act of 1933, all of which is to be done by the Company without expense to Industrial. The agreement further provides that Industrial Acceptance Corporation Limited shall have no responsibility for any statement made in the Registration Statement, except to the extent that it supplied information for the Registration Statement. The first 100,000 shares being offered under this Prospectus are the 100,000 shares issued by the * * * [petitioner] 1953 U.S. Tax Ct. LEXIS 152">*174 to Industrial and are being offered for the account of Industrial Acceptance Corporation Limited. There is no affiliation between Industrial Acceptance Corporation Limited and the * * * [petitioner] * * *

If the proceeds to Industrial from the sale of the 100,000 shares of Common Stock do not equal or exceed the sum of $ 2,214,969.94, Canadian funds, the Company must make good the amount of any deficiency * * *

Under date of November 22, 1946, petitioner and Industrial entered into an underwriting agreement with Van Alstyne, Noel & Co., Johnston, Lemon & Co., and Crowell, Weedon & Co., pertaining to the shares registered as above described. In the first paragraph of that agreement it was stated that petitioner "proposed to issue and sell an aggregate of 100,000 shares of common stock of the par value of $ 1 each, and the undersigned common stockholder, Industrial Acceptance Corporation Limited, hereinafter sometimes referred to as the 'Selling Stockholder,' proposed to sell an aggregate of 100,000 shares of outstanding common stock of the par value of $ 1 each of the Company."

The preparation and filing of the registration statement was delayed because of problems encountered in1953 U.S. Tax Ct. LEXIS 152">*175 the completion of an audit of Campbell and petitioner.

The delay between the effective date of the registration statement and the marketing of Industrial's 100,000 shares of stock of petitioner was attributable to the fact that the underwriters refused to make a public offering of stock in petitioner because of then existing market conditions.

20 T.C. 405">*414 Of the 200,000 shares of common stock registered as above described, 100,000 shares were offered for sale to the public on or about November 22, 1946. These shares were the shares which had been issued by petitioner to Industrial.

The net proceeds, after deduction of underwriting commissions, from the sale of the 100,000 shares of stock in petitioner were $ 1,440,000. On November 30, 1946, petitioner sent the following letter to Industrial:

November 30, 1946

Mr. J. P. A. Smyth, President

Industrial Acceptance Corporation Limited

Sun Life Building

Montreal, Canada

In re: Seaboard Finance Company

Dear Mr. Smyth:

As per our conversation of today, I hereby confirm the purchase of Campbell Finance Corporation Limited in accordance with the terms of contract dated as of January 2, 1946.

In accordance with the terms of the Underwriting1953 U.S. Tax Ct. LEXIS 152">*176 Agreement dated November 22, 1946, between your corporation, our corporation and the underwriters therein mentioned, we have arranged the sale for your account of 100,000 shares of our common stock issued to you to net you $ 14.40 per share. We hereby guarantee to you payment of said sum and hold you harmless against any loss in connection with the sale of said stock under the terms of said contract.

For convenience between us and without in any way intending to change the ownership of said shares, we authorize you to charge against the $ 2,200,000 good faith deposit held by you an amount equal to the proceeds from the sale of this stock provided you will instruct Guaranty Trust Company of New York, to which you will send this stock for delivery to the underwriters, to deposit the proceeds to our account for your credit.

The balance of the purchase price of the Campbell shares you are also authorized to deduct from the deposit fund held by you.

* * * *

Petitioner paid dividends to Industrial on account of the 100,000 shares of common stock of petitioner held by Industrial in the total amount of $ 72,000 (Canadian); and interest, pursuant to the provisions of the agreement of March1953 U.S. Tax Ct. LEXIS 152">*177 27, 1946, in the amount of $ 21,938.99. During the same period Industrial paid or credited to petitioner interest on $ 2,200,000 (Canadian) deposited pursuant to the terms of the agreement of March 27, 1946, in the total amount of $ 69,164.38 (Canadian). The dividends paid to Industrial on the 100,000 shares of petitioner's stock issued under the agreement of March 27, 1946, were credited against petitioner's interest obligation to Industrial.

On March 27, 1946, and April 1, 1946, the official exchange ratio of the Canadian dollar to the United States dollar was .9090. In November and December 1946, the official exchange ratio of the Canadian dollar to the United States dollar was par, less one-half of 1 per cent on conversion, or an effective ratio of .995, which had been in effect since July 5, 1946.

20 T.C. 405">*415 In August 1946, Industrial offered for sale to the public $ 2,000,000 of its 3 1/2 per cent 20-year sinking fund debentures series "A," and under date of August 26, 1946, circulated a prospectus relating to that offer. The prospectus contained the following statement relative to Campbell Finance Corporation Limited:

In 1940 when it became evident that the manufacture of1953 U.S. Tax Ct. LEXIS 152">*178 automobiles, radios, refrigerators and other durable consumer goods would be curtailed for the duration of the war the Company purchased all of the capital stock of Campbell Finance Corporation Limited (then known as Campbell Auto Finance Company Limited) in order to provide another avenue for the employment of the Company's resources. The business of Campbell Finance Corporation Limited consisted principally of making small loans under the Dominion Small Loans Act of 1939 and operated from its head office in Toronto as well as three branches in the Province of Ontario. Facilities available through the country-wide net work of branches of Industrial Acceptance Corporation Limited made it possible to develop a very substantial and profitable small loans business during the intervening years, thus materially assisting the company to maintain its branch organization and earnings.

With the prospect of the return of installment sales financing in larger volume than has been enjoyed by the Company in the past, the Directors entered into an agreement with Seaboard Finance Company, one of the larger personal loan companies in the United States, for the sale of all of the shares of Campbell1953 U.S. Tax Ct. LEXIS 152">*179 Finance Corporation Limited as at January 2nd, 1946, at a price which gives Industrial Acceptance Corporation Limited a very substantial profit on its investment. As a result of this agreement the Company will withdraw from the small loans field and will have available for its regular installment sales finance business all of the capital employed in that business before the war, plus the profit realized. The Company has received 100,000 shares of the common stock of Seaboard Finance Company and the latter has undertaken to arrange for the sale of these shares on or before November 30th, 1946, and has guaranteed to Industrial Acceptance Corporation Limited the receipt of $ 2,214,970. Until November 30th, 1946, Seaboard Finance Company may be relieved of this guarantee by returning the shares of Campbell Finance Corporation Limited and making payment of substantial sums of cash to Industrial Acceptance Corporation Limited. Seaboard Finance Company has deposited with the Company cash collateral of $ 2,200,000 to guarantee the fulfillment of its obligations.

Industrial did not want to become, and did not intend to become, a stockholder of petitioner; and petitioner did not want Industrial1953 U.S. Tax Ct. LEXIS 152">*180 to become a stockholder.

Petitioner was not a dealer, trader, speculator, or investor in foreign exchange.

Petitioner sold all of its Campbell stock on December 31, 1946.

Petitioner's use of foreign exchange in the purchase of the Campbell stock, in accordance with obligations incurred under the purchase contract of March 27, 1946, did not constitute a transaction in foreign exchange requiring recognition of a taxable gain separate and apart from the subsequent sale of the stock. Respondent properly eliminated the gain on foreign exchange reported by petitioner in its return for the taxable year involved.

20 T.C. 405">*416 OPINION.

Although the facts and particularly the details of the arrangement giving rise to the present controversy are complicated and the contentions of the parties cover a wide range of discussion, the central problem seems to us not so involved as might at first appear. Petitioner committed itself to purchase stock of a Canadian corporation which for convenience we call the Campbell stock, guaranteeing to the seller the sum of $ 2,214,969.94 in Canadian dollars. This amount was to be realized first, out of the sale of 100,000 of petitioner's shares issued to the seller, 1953 U.S. Tax Ct. LEXIS 152">*181 but to be sold by petitioner, and secondly, from petitioner's agreement to make good to the seller any deficit. As security petitioner was required to deposit in escrow $ 2,200,000 (Canadian) as well as the shares of its stock, pending completion of the details of sale. Petitioner purchased the $ 2,200,000 Canadian for $ 2,000,000 United States almost immediately after the execution of the agreement. Some 7 months later, after its stock had been marketed for an amount substantially less than the guaranteed price, petitioner authorized the purchaser to apply the deposit to the purchase price.

In the meantime Canadian exchange had risen in value to a point where petitioner claims it realized a gain on the Canadian dollars of the difference, $ 189,000, between the exchange rate at the time they were purchased and at the time they were turned over to the seller of the Campbell stock. The reason for the peculiar contention by the taxpayer that it has realized a gain contrary to respondent's determination that it has not, is petitioner's position that the gain having taken place in Canada it constitutes the basis for a credit against its United States tax which apparently both parties1953 U.S. Tax Ct. LEXIS 152">*182 agree would result in a computation beneficial to petitioner.

We find it unnecessary to pass upon what respondent refers to as his primary argument. It is that the doctrine of such cases as Bernuth Lembcke Co., 1 B.T.A. 1051">1 B.T.A. 1051, acq. IV-2 C. B. 3, and Joyce-Koebel Co., 6 B.T.A. 403">6 B.T.A. 403, acq. VI-2 C. B. 4, is not applicable to isolated or single transactions involving foreign exchange. See American Pad & Textile Co., 16 T.C. 1304">16 T.C. 1304. Even if the doctrine of those cases were applicable to these facts, we think petitioner could not succeed.

The basic principle of those cases may be summarized by a quotation from 1 B.T.A. 1051">Bernuth Lembcke Co., supra, 1054:

The creosote oil could not be inventoried * * * at more than its actual cost and the cost was in terms of the exchange at the date of purchase. * * * [Emphasis added.]

Applying that concept here, the cost of the Campbell stock would be the $ 2,214,969.94 Canadian converted into United States dollars at the rate of exchange prevailing on the date of purchase, March 27, 1946. 20 T.C. 405">*417 As we have said, at approximately1953 U.S. Tax Ct. LEXIS 152">*183 the same date and at no different rate of exchange, petitioner purchased $ 2,200,000 (Canadian) which it used in connection with the purchase.

The remaining analysis must be stated in terms of hypotheses since both parties deal with the subject in alternatives not necessarily consistent with each other. But on any approach the result is a dilemma from which petitioner cannot escape. If, on the one hand, the Canadian dollars were actually used to pay the purchase price, then no gain or loss on foreign exchange could have resulted ¹ in view of the fact that the exchange rate on the date of purchase of the Campbell stock and of the Canadian dollars was apparently identical. If on the other hand the use of the Canadian dollars which actually took place was, as petitioner contends, a mere short cut for a longer operation which would have involved the conversion of the Canadian dollars into American funds and the purchase of Canadian dollars at that time out of the proceeds of the sale of petitioner's stock, then, if we apply the doctrine of Bernuth-Lembcke Co., supra, any gain on the purchase and sale of the Canadian dollars would be offset by the loss1953 U.S. Tax Ct. LEXIS 152">*184 sustained between the purchase price of the Campbell stock converted into dollars at the date of purchase and the amount of American dollars required to purchase the same number of Canadian dollars when payment was subsequently made. See James A. Wheatley, 8 B.T.A. 1246">8 B.T.A. 1246, acq. VIII C. B. 34.

Petitioner attempts, it is true, to escape from this difficulty by the contention "that there is not an inflexible rule of application to these foreign exchange cases. Certainly * * * where petitioner could not determine its cost until certain events occurred it would be error to1953 U.S. Tax Ct. LEXIS 152">*185 rule that the cost was determined on March 27, 1946." With deference, this appears to us to be an argument in a circle. We assume that under the principles stated petitioner could and should have determined its cost as of March 27 by the mere process of computing from the fixed amount of $ 2,214,969.94 Canadian at the then rate of exchange its cost in American dollars. In the end result and regardless of what occurred on the marketing of the stock, those Canadian dollars were required to be paid. If the cases in question are applicable petitioner could have computed its cost. And they therefore cannot be held inapplicable on the ground that petitioner could not compute its cost.

There is a third possibility that on account of the complicated nature of the transaction, it might be contended that petitioner merely borrowed the funds with which the Canadian dollars were secured, 20 T.C. 405">*418 and later repaid them; or that petitioner in effect loaned the Canadian dollars to the seller pending the completion of the details of purchase; but in either event no gain or loss would have taken place. North American Mortgage Co., 18 B.T.A. 418">18 B.T.A. 418; see B. F. Goodrich, 1 T.C. 1098">1 T.C. 1098;1953 U.S. Tax Ct. LEXIS 152">*186 16 T.C. 1304">American Pad & Textile Co., supra.

Viewing the matter practically and eliminating as far as possible the complications of detail, petitioner was in fact no better off or worse off by reason of its transactions in Canadian currency. Whether we deal with the subject as a matter of form or of substance, it accordingly follows that no gain was realized and that the deficiency was correctly determined.

Decision will be entered for the respondent.