Amerex Holding Corp. v. Commissioner , 37 B.T.A. 1169 ( 1938 )

AMEREX HOLDING CORPORATION (FORMERLY THE CHASE CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Amerex Holding Corp. v. Commissioner

Docket No. 75357.

United States Board of Tax Appeals

37 B.T.A. 1169; 1938 BTA LEXIS 933;

June 30, 1938, Promulgated

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">*933 The stockholders of A Corporation and C Bank were identical and, under a deposit agreement, held their stock in units composed of one share of each corporation, the articles of A providing that the transfer of a share of C Bank ipso facto resulted in the transfer of a share of A. C Bank entered into a consolidation agreement with M Bank whereby the stockholders of M Bank would receive 25 percent of C Bank's stock for what amounted to more than 98 percent of M Bank assets. The parties also contemplated the acquisition by M Bank stockholders of 25 percent of A Corporation stock. This was to be effected by the transfer of M Bank assets having a value of $500,000, and being less than 2 percent of the total assets of M Bank, to a new corporation for all of its shares, after which the shares of the new corporation were to be transferred to A Corporation under an agreement between A Corporation and the stockholders of M Bank and A Corporation was to issue the said 25 percent of its stock to the stockholders of M Bank. A Corporation was bound to issue 25 percent of its shares to the stockholders of M Bank only upon condition that the consolidation of M Bank and C Bank should occur">*934 through the transfer of M Bank assets to C Bank for 25 percent of the stock of C Bank. In accordance with the proposed plans and subject to the agreements, A authorized the additional shares, earmarking them for the use agreed on and thereafter issued the said shares in accordance therewith, receiving the stock of the new corporation, While C Bank received all to the assets of M Bank except the assets used in organizing the new corporation. For the stock of the new corporation and the assets of M Bank transferred to C Bank the M Bank stockholders received 25 percent of the stock of A Corporation and 25 percent of the stock of C Bank. Approximately two years later and during the taxable year, the new corporation was dissolved and upon such dissolution A Corporation, the petitioner herein, received $444,816.94 in cash. Held, that the 25 percent of the stock of A Corporation issued to the M Bank stockholders was issued not only for the stock of the new corporation actually received by A Corporation, but also as a part of the consideration for the assets of M Bank which were transferred to C Bank, and, on the evidence, that the cost to petitioner of the shares of the new corporation">*935 was not in excess of $500,000.

Joseph B. Lynch, Esq., Raymond N. Beebe, Esq., and John H. Alexander, Esq., for the petitioner.

Bruce A. Low, Esq., L. H. Rushbrook, Esq., and E. P. McCorcoran, Esq., for the respondent.

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TURNER

">*1170 These proceedings were brought to redetermine a deficiency in income tax for the year 1928 in the amount of $510,226.02. The only question presented is whether the petitioner sustained a deductible loss, and if so the amount thereof, upon the dissolution during the taxable year of its wholly owned subsidiary, the Mechanics Securities Corporation.

FINDINGS OF FACT.

The petitioner is a New York corporation, with its principal offices and place of business in New York City. Its certificate of incorporation was filed and recorded in the office of the Secretary of State for New York on May 29, 1917, the corporate name being shown as Chase Securities Corporation. In 1933 the name was changed to "The chase Corporation," and in 1934 the present name was adopted. The petitioner's existence has been continuous, however, and the changes of name have not affected its identity. It filed its income tax return">*936 for the year 1928 with the collector of internal revenue in New York City.

The Chase National Bank of the City of New York, hereinafter referred to as the Chase Bank, was organized under the banking laws of the United States in 1877. At the time petitioner was organized in 1917, the capital stock of the Chase Bank, authorized and outstanding, amounted to 100,000 shares having a par value of $100 per share.

On March 26, 1917, a letter signed by four individuals as a committee was sent to all of the shareholders of Chase Bank, proposing and recommending the organization, under the laws of New York, of a business corporation with powers to conduct a general securities business. It was explained that the Chase Bank, because of the limited scope of powers of banking corporations, could not take advantage of attractive business opportunities which frequently presented themselves and it was pointed out that the shareholders of a number of other banks had, "in order to be in a position to embrace such opportunities", organized business corporations in which the proportionate interests of the shareholders in the bank and in the other corporation were the same and the shares of the two">*937 corporations were transferable ">*1171 together. The committee proposed that the capital stock of the securities corporation should be without nominal or par value and should consist of the same number of shares as that of the bank. The assenting stockholders were to deposit their bank stock with the Bankers Trust Co., designated as depositary, and when an appropriate number of stockholders of the bank assented to the plan a special dividend of 25 percent, totaling $2,500,000, was to be declared by the bank and, in the case of the assenting stockholders, paid over to the committee to be used in purchasing for their account, at a rate of $25 per share, the same number of shares of the securities corporation which each such stockholder held in the Chase Bank. The stock in the securities corporation was to be deposited by the committee with the depositary along with the stock of the bank and the depositary would then issue to each depositing shareholder a receipt indicating the number of shares owned by him. It was explained that, for the purpose of carrying out the plan, the committee had entered into an agreement with the Bankers Trust Co. as depositary and that the deposit">*938 agreement had already been signed by or on behalf of the owners of 60 percent of the stock of the Chase Bank. The receipts issued by the Bankers Trust Co. were the form in which the stock was to be traded in on the open market and no separate trading in the bank stock or the securities corporation stock was to be allowed. The shares of stock were to remain in the names of the respective shareholders, who would retain all voting powers and rights to dividends payable thereon.

The plan was approved by the stockholders of the Chase Bank and the petitioner was organized as above indicated with an initial capital of $2,500,000 represented by 100,000 shares without par value. The Chase Bank declared the necessary 25 percent dividend, which was paid to the petitioner for its entire issue of stock. All of the stock of the bank and that of the petitioner was deposited with the Bankers Trust Co. under the deposit agreement and receipts therefor were issued to the stockholders as outlined above. Upon issuance of the petitioner's stock under the plan outlined, the said stock, under the provisions of petitioner's charter, became nontransferable except in conjunction with an equal number">*939 of shares of the Chase Bank. The charter further provided that the sale, pledge, or transfer of any shares of stock of the Chase Bank should "operate ipso facto as a transfer to the same person of a like interest and an equal number of shares of stock of this corporation."

Additional stock was authorized and issued from time to time by the petitioner and the Chase Bank. The additional shares were issued simultaneously and in equal amounts and on February 11, 1926, each corporation had 200,000 shares of stock authorized and outstanding. The additional stock of each corporation was deposited as it ">*1172 was issued with the Bankers Trust Co. under the deposit agreement described above.

At some time prior to February 10, 1926, negotiations were entered into for the consolidation of the Chase Bank and the Mechanics & Metals National Bank of the City of New York, hereinafter referred to as the Mechanics Bank. The Mechanics Bank had also been organized under the banking laws of the United States, and had capital stock authorized and outstanding amounting to 100,000 shares with a par value of $100 per share. On February 10, 1926, a proposed agreement of consolidation was">*940 presented to the board of directors of the Chase Bank for consideration and a resolution was adopted authorizing and directing a majority of the board to enter into an agreement in the form submitted, with such changes as counsel might approve. It was also resolved that a special meeting of the shareholders of the Chase Bank be called for March 18, 1926, "for the purpose of ratifying and confirming the terms and conditions" governing consolidation of the two banks. On the following day, February 11, 1926, the matter was brought to the attention of the board of directors of the Mechanics Bank and action was taken similar to that of the directors of the Chase Bank on the preceding day, including the adoption of a resolution submitting the matter to the shareholders of the Mechanics Bank at a special meeting of such shareholders to be held on March 18, 1926.

Under date of February 11, 1926, the directors of Chase Bank entered into a written "Agreement of Consolidation" with the directors of the Mechanics Bank. The agreement declared a consolidation of the two banks under the charter and title of "The Chase National Bank of the City of New York." It provided that the capital stock">*941 of the consolidated bank should be $40,000,000, divided into 400,000 shares of the par value of $100 each. The capital, surplus, and undivided profits at the effective date of consolidation were to aggregate $79,000,000. Of the capital stock, 200,000 shares were allotted, share for share, to the shareholders of the Chase Bank as it then existed and 100,000 shares were to be offered to these same shareholders pro rata at a price of $100 per share, but if the 100,000 shares so offered were not purchased on or before the effective date they were to be sold on the market. The remaining 100,000 shares of the consolidated bank were allotted to the shareholders of the Mechanics Bank share for share.

The consolidated bank was to retain or receive all of the assets of each bank except assets of the Mechanics Bank of a value of $500,000, and to retain or assume all of their liabilities, subject only to the gains or losses in the ordinary course of business between the date of the consolidation agreement and the effective date of consolidation. The assets contributed by each bank were to be passed upon by a committee ">*1173 of six, three to be appointed by the board of directors">*942 of each bank. It was provided that the net assets to be furnished by the Chase Bank should "equal not less than approximately" $55,000.000 of the capital, surplus and undivided profits of the consolidated bank, and the net assets to be furnished by the Mechanics Bank above liabilities should equal not less than $24,000,000 of such capital, surplus, and undivided profits. It was further provided that the assets of the Mechanics Bank aggregating $500,000 which were excepted from the transfer to the consolidated bank should be approved by the committee of six and transferred "before the effective date of the consolidation" to a corporation the stock of which was to be distributed pro rata to the shareholders of the Mechanics Bank or their assigns, upon terms and under conditions deemed proper by its board of directors. The consolidation was to become effective when ratified and confirmed by the affirmative vote of the shareholders of each bank owning at least two-thirds of the capital stock thereof outstanding, at a meeting to be held pursuant to a call made by its directors, and when approved by the Comptroller of the Currency of the United States.

At their meeting on February 11, 1926, the">*943 board of directors of the Mechanics Bank, in addition to voting approval of the agreement of consolidation and authorizing and directing the execution thereof, took specific action for the organization of a new corporation which was to receive the assets of the bank of a value of $500,000, the stock of which was to be distributed to the Mechanics Bank shareholders pro rata. Provision was made, however, that, if the consolidation of the two banks should for any reason not become effective in the manner provided in the agreement of consolidation, the assets so transferred to the new corporation should be retransferred to the Mechanics Bank. The new corporation was later designated as Mechanics Securities Corporation, sometimes referred to herein as Mechanics Securities. Preliminary to the adoption of the resolution providing for the organization of the new corporation, forms of agreement, referred to as "deposit Agreement" and "Exchange Agreement" were submitted to the meeting. The deposit agreement, which was dated February 11, 1926, and was duly executed by the parties thereto on or about said date, reads in part as follows:

AGREEMENT, dated as of February 11, 1926, by and between">*944 such persons owning shares in The Mechanics & Metals National Bank of the City of New York (herein called the Bank) as shall become parties hereto as herein provided (herein called the Shareholders), parties of the first part, and George Q. Palmer, J. Herbert Carpenter and Leonard S. Hentz as a Committee of the Shareholders (herein called the Committee), parties of the second part, and Bankers Trust Company, of the City of New York, New York, as Depositary (herein called the Depositary), party of the third part.

WHEREAS, the Shareholders deem it to their advantage that the Bank be consolidated with The Chase National Bank of the City of New York (herein called the Chase National Bank) under an agreement of consolidation dated ">*1174 February 11, 1926, between said banks and a majority of the members of their respective Boards of Directors (herein called the Consolidation Agreement), a copy of which has been filed with the Depositary and which agreement is hereby made a part hereof; and

WHEREAS, the Consolidation Agreement provides that assets of the Bank of an aggregate value of Five hundred thousand Dollars ($500,000) to be approved by the Committee of Six provided for">*945 in the Consolidation Agreement shall be transferred before the effective date of the consolidation to a corporation the stock of which shall be distributed pro rata to the shareholders of the Bank upon whatever terms and under whatever conditions shall be deemed proper; and

WHEREAS, pursuant to said provision the Board of Directors of the Bank has adopted a plan (herein called the Plan) to segregate certain assets of the Bank of an aggregate value of Five Hundred thousand Dollars ($500,000) as approved by the committee provided for in the Consolidation Agreement in a corporation to be organized under the laws of the State of New York, with an authorized capital stock of one hundred thousand (100,000) shares with or without nominal or par value (herein called the Securities Corporation) and to distribute all the shares of the capital stock of the Securities Corporation pro rata to the shareholders of the Bank, a copy of the Plan being annexed hereto;

WHEREAS, the Shareholders deem it to their advantage to effect an arrangement whereby the shares to which they may become entitled in the Securities Corporation, under the Plan, shall be exchanged for shares of Chase Securities Corporation, ">*946 a corporation organized and existing under the laws of the State of New York, with an authorized capital stock (including the additional shares about to be authorized in connection with the arrangement herein contemplated) of four hundred thousand (400,000) shares without nominal or par value, on the basis of share for share, and Chase Securities Corporation has agreed with the Committee to make such exchange on the terms and conditions set forth in the agreement bearing even date herewith (herein called the Exchange Agreement), a copy of which is annexed hereto; and

WHEREAS, in the manner and to the extent herein provided or contemplated, the Committee has consented to represent the Shareholders in connection with the consummation of the Consolidation Agreement, the Plan and the Exchange Agreement;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the Shareholders severally agree with the Committee, and the Committee agrees with each of the Shareholders and each of the Shareholders agrees with each of the others, as follows:

1. Messrs. George Q. Palmer, J. Herbert Carpenter and Leonard S. Hentz are hereby constituted">*947 and appointed a Committee of the Shareholders, with full power and authority to carry out and perform this agreement in their behalf, and to do any and all things deemed by them advisable to that end. * * *.

2. Any Shareholder of the Bank may become a party hereto by signing this agreement in person or by attorney, or by delivering to the Depositary the certificate or certificates representing all shares in the Bank held by him, or in such other manner as is hereinafter provided or as the Committee may in its discretion determine; provided, however, that all such Shareholders desiring to participate in the benefits of this agreement must become parties hereto on or before March 17, 1926, or on or before such later date, if any, as the Committee in its discretion may determine. The Committee may permit Shareholders either generally or in specific cases to become parties hereto after the ">*1175 lapse of any period of time under such terms, conditions, or penalties as it shall in its absolute discretion deem proper. Deposited shares of the Bank may not be withdrawn until after May 1, 1926, or such later date as the Committee may consent to in writing, unless the Consolidation">*948 Agreement shall have sooner been declared by the Committee to have been abandoned.

3. Each of the Shareholders hereby irrevocably appoints the members of the Committee or any one or more thereof as his attorneys or attorney, agents or agent, proxies or proxy, with full power of substitution to all or any of them, for the following purposes, to wit:

(1) To attend the special meeting of the Shareholders of the Bank to be held on March 18, 1926, at 2 p.m., and any adjournment or adjournments thereof or any other meeting of such Shareholders at which the subject may be considered, and to vote all the shares of the Bank that each Shareholder shall be entitled to vote on the question of ratifying and confirming the terms and conditions agreed upon by a majority of the Board of Directors of the Chase National Bank and by a majority of the Board of Directors of the Bank to consolidate the said two banking associations into one association under the charter of the Chase National Bank in accordance with the provisions of the Consolidation Agreement and upon all other questions and in connection with the transaction of any other business that may properly come before any such meeting, with">*949 all the powers which each Shareholder would possess if present personally at said meeting or any adjournment thereof;

(2) To receive from the Chase National Bank for account of each Shareholder the shares of the Chase National Bank which each Shareholder shall be entitled to receive under the Consolidation Agreement, in case the same shall become effective as therein provided, in respect of the shares of the Bank registered in the name of each Shareholder;

(3) To receive for account of each Shareholder all the shares of stock of the Securities Corporation which each shareholder shall be entitled to receive under the provisions of the Consolidation Agreement, in case the same shall become effective as therein provided, and of the Plan adopted by the Board of Directors of the Bank in accordance with the provisions of the Consolidation Agreement to give effect thereto, namely, one share of the Securities Corporation for each share of the Bank registered in the name of each Shareholder; to endorse in blank on behalf of each Shareholder the stock certificates representing the shares of the Securities Corporation so received; to deliver the same so endorsed in blank to Chase Securities">*950 Corporation on behalf of each Shareholder and to receive on behalf of each Shareholder the shares of Chase Securities Corporation deliverable in exchange therefor in accordance with the Exchange Agreement, at the rate of one share of such stock for each share of stock of the Securities Corporation so delivered.

(4) To deposit for the account of each Shareholder the shares of the Chase National Bank and of Chase Securities Corporation so received for the account of each Shareholder with Bankers Trust Company, as depositary under the Deposit Agreement dated March 21, 1917, relating to the stock of the Chase National Bank and Chase Securities Corporation, a copy of which is on file with the Depositary, and by such deposit or otherwise to agree with each holder and with all holders of receipts theretofore or thereafter issued by the depositary under said Deposit Agreement dated March 21, 1917, and with such depositary that the certificates representing said shares of the Chase National Bank and Chase Securities Corporation shall be held by such depositary, and that a receipt or receipts therefor shall be delivered to and accepted by each Shareholder and/or his assigns under and pursuant">*951 to the provisions of the ">*1176 said agreement with the same effect as though said shares had been held thereunder at the time when as therein provided the depositary was first authorized to issue its receipts representing shares of the Chase National Bank and of Chase Securities Corporation.

(5) To take such further action on behalf of each Shareholder as may be necessary or advisable to carry out the provisions of the Consolidation Agreement, the Plan and the Exchange Agreement, and to consummate the general arrangement outlined in said documents.

Each of the Shareholders hereby ratifies and confirms all that said attorneys or attorney, agents or agent, proxies or proxy, shall do or cause to be done by virtue of the foregoing provisions. Each Shareholder agrees upon deposit of his shares of the Bank with the Depositary as herein contemplated to deliver to such Depositary a separate proxy, consent and power of attorney similarly authorizing and empowering the above mentioned proxies and agents, duly executed by such Shareholders. Each Shareholder also hereby authorizes such proxies and agents to comply with any request or instructions given by the Committee which in">*952 its unrestricted discretion it may deem in furtherance of the purposes of this agreement.

* * *

10. After the consolidation provided for in the Consolidation Agreement shall have become effective in the manner provided therein, and receipts of the Bankers Trust Company as Depositary issued under the said agreement dated March 21, 1917, shall have been delivered to the Shareholders entitled to receive the same in accordance with the provisions of this agreement, or, to the extent not so delivered, shall have been deposited with the Depositary under irrevocable instructions to deliver the same to the Shareholders upon surrender of their temporary receipts issued hereunder, the Committee shall cease to exist, and any and all rights, duties, powers, functions and authority theretofore vested in it shall become vested in the members of the Board of Directors of Chase National Bank as constituted from time to time, under whose instructions, as evidenced by a writing signed by them or a majority of them, the Depositary shall thereafter act. In case the Consolidation Agreement shall not have become effective in the manner provided therein, and the receipts of Bankers Trust Company as">*953 depositary under the said agreement of March 21, 1917, representing the stock of Chase National Bank and Chase Securities Corporation shall not be available for delivery to holders of temporary receipts issued hereunder by May 1, 1926, or by such later date as the Committee may consent to in writing, the holders of the temporary receipts issued hereunder shall become entitled on the surrender thereof, properly endorsed, to withdraw the shares of stock of the Bank represented by their receipts.

* * *

The exchange agreement referred to above reads as follows:

[EXCHANGE AGREEMENT]

February 11, 1926.

CHASE SECURITIES CORPORATION,

61 Broadway,

New York City.

Dear Sirs:

The undersigned, as the Committee constituted under Deposit Agreement bearing even date herewith (a copy of which is delivered to you herewith) to represent Shareholders of The Mechanics & Metals National Bank of the City of New York, who shall become parties to such agreement, in connection with the consummation of the Consolidation Agreement and the Plan referred to in said Deposit Agreement, hereby confirm the agreement made with you ">*1177 for the issuance of your stock in exchange for the">*954 stock of the corporation to which the Shareholders under the above mentioned Deposit Agreement may become entitled in accordance with and upon the consummation of the Consolidation Agreement and the Plan as contemplated in such Deposit Agreement, on the basis and on the terms and conditions hereinafter set forth, namely:

1. The obligations assumed by you hereunder are subject to compliance to your satisfaction with the following conditions:

(a) The consolidation of The Mechanics & Metals National Bank of the City of New York with The Chase National Bank of the City of New York shall have become effective in the manner provided in said Consolidation Agreement.

(b) The corporation (herein called the "Securities Corporation") as contemplated in said Plan shall have been duly organized under the laws of the State of New York with an authorized capital stock of 100,000 shares with or without nominal or par value, with charter purposes similar to yours, and with the provisions of its charter and bylaws satisfactory to and approved by you.

(c) After the terms and conditions of said consolidation shall have been ratified and confirmed by the shareholders of each of said banks, and">*955 prior to the time when the same shall become effective in the manner provided in said Consolidation Agreement, The Mechanics & Metals National Bank of the City of New York shall, in accordance with provisions of said Consolidation Agreement and the resolutions adopted by its Board of Directors to give effect thereto (called the Plan), transfer to the Securities Corporation assets which, previous to such transfer, shall have been passed upon and accepted at an aggregate value of $500,000 by the Committee of Six appointed as contemplated in said Consolidation Agreement to pass upon the assets to be contributed by the respective associations, parties to said Consolidation Agreement, in consideration of the agreement of the Securities Corporation to issue all of its authorized shares of stock pro rata to the shareholders of The Mechanics & Metals National Bank of the City of New York.

(d) There shall have been deposited with the Depositary of the undersigned Committee not less than 66,667 (or such lesser number as you may approve) shares of The Mechanics & Metals National Bank of the City of New York, under and subject to all of the terms and conditions of said Deposit Agreement, which">*956 shares shall be then held by said Depositary, subject to the right of the Committee to dispose of the shares of The Chase National Bank of the City of New York and of the Securities Corporation deliverable in respect thereof, as provided in said Deposit Agreement.

2. Upon being satisfied that all of the foregoing conditions have been complied with, you are to issue at any time or from time to time on or prior to May 1, 1926 (or such later date as you may consent to), at the request of the undersigned Committee or its Depositary your shares of stock fully paid and non-assessable in exchange for the fully paid and non-assessable shares of stock of the Securities Corporation on the basis of one share of your stock for each share of the stock of the Securities Corporation delivered, endorsed in blank, to you or to your designated representative. Any transfer stamps required on the delivery of any such shares to you shall be provided by you. All shares of your stock to be issued as above provided shall be delivered as follows:

(a) As contemplated in subdivision (4) of Section 3 of said Deposit Agreement, the undersigned will deposit or cause to be deposited with Bankers Trust Company, ">*957 as depositary under the Deposit Agreement dated March 21, 1917, relating to the stock of The Chase National Bank of the City of New York and of Chase Securities Corporation, all the certificates representing the shares of The Chase National Bank of the City of New York to which the Shareholders">*1178 as defined in the Deposit Agreement are entitled on the consummation of the Consolidation Agreement, from time to time as the same are received by or on behalf of the undersigned Committee, and will cause said Bankers Trust Company to notify you of the receipt by it of such certificates, specifying the number of shares of stock represented thereby and the names in which the same are issued.

(b) Upon receipt of notice from said Bankers Trust Company, as above provided, you will deliver to said Bankers Trust Company for account of the undersigned a certificate or certificates for an equal number of shares of your stock issued in the same names as shall have been so certified to you by said Bankers Trust Company, provided there shall have been delivered to you or your representative by or on behalf of the undersigned Committee at such place or places as may be agreed upon with you, ">*958 a certificate or certificates, duly endorsed in blank, for stock of the Securities Corporation to an amount equal to one share of such stock for each share of your stock so to be delivered to said Bankers Trust Company on behalf of the undersigned Committee.

(c) The undersigned Committee agrees to and does hereby irrevocably instruct the Bankers Trust Company as Depositary under the said Deposit Agreement dated March 21, 1917, to hold all shares of stock of The Chase National Bank of the City of New York delivered to said depositary as contemplated under paragraph (4) of Section 3 of the Deposit Agreement and all shares of stock issued by Chase Securities Corporation and delivered to said Bankers Trust Company as above provided under and subject to the terms of said Deposit Agrement of March 21, 1917, and to issue its receipt or receipts for said shares of The Chase National Bank of the City of New York and of Chase Securities Corporation and to deliver the same to the respective Shareholders under the Deposit Agreement and/or their assigns under and pursuant to the provisions of said Deposit Agreement of March 21, 1917, with the same force and effect as though said shares had been">*959 held under said Deposit Agreement of March 21, 1917, at the time when as therein provided said Depositary was first authorized to issue its receipts representing shares of The Chase National Bank of the City of New York and of Chase Securities Corporation.

3. The obligations assumed by you hereunder are subject to the further condition that the requisite consent of your stockholders to the necessary increase of your authorized capital stock to effect the exchange herein provided for shall have been obtained and all proceedings to effect such increase shall have been taken prior to the time when, in accordance with the provisions hereof, you are obligated to make delivery of your stock for the purpose herein provided.

4. In the event of the delivery to you, as herein provided, of shares of the Securities Corporation at least equal to the number of shares provided for in subparagraph (d) of paragraph 1 of this Agreement, you are to pay, as contemplated in Section 8 of the said Deposit Agreement, all the expenses and compensation of the Committee and of its Depositary.

If the foregoing is in accordance with your understanding, please indicate your acceptance on a duplicate">*960 of this letter enclosed herewith for the purpose

Very truly yours,

GEORGE Q. PALMER

J. HERBERT CARPENTER

LEONARD S. HENTZ

Committee representing Shareholders of The Mechanics & Metals National Bank of the City of New York constituted under Deposit Agreement dated as of February 11, 1926.

">*1179 The above exchange agreement, bearing date of February 11, 1926, was approved and accepted by the petitioner corporation on or about that date.

A special meeting of the board of directors of the petitioner was held in New York City on February 13, 1926. In accordance with the stated purpose of the meeting a resolution was adopted declaring that in the judgment of the board petitioner's authorized capital stock should be increased from 200,000 shares to 400,000 shares. In the whereas clauses the resolution recited that all of the outstanding stock of the petitioner corporation and the Chase Bank was then held subject to the deposit agreement of March 21, 1917; that the petitioner's certificate of incorporation did not permit any of the shares to be pledged, sold, or disposed of without a similar disposition of an equal number of shares of the bank; that the certificate">*961 of incorporation provided that a sale, pledge, or disposition of shares of bank stock operated ipso facto as a transfer to the same person of a like interest and an equal number of shares in the petitioner; that it was the purpose and intent of the agreement of March 21, 1917, and of the provisions of the certificate of incorporation to require each holder of shares in the bank to be the holder of an equal number of shares in the petitioner; that the board was advised that the officers and directors of the bank had taken steps looking to its consolidation with the Mechanics Bank and in effecting that consolidation proposed to increase the shares of the bank from 200,000 to 400,000; and that it would be inadvisable that the shares in the petitioner corporation be owned by others than those who were shareholders of the bank or that the number of shares of petitioner corporation so owned should differ from the number of shares owned in the bank. After the above recitation it was resolved that in the judgment of the board the authorized stock of the petitioner corporation should be increased from 200,000 shares to 400,000 shares; that 100,000 shares of the new issue should be offered">*962 to the then stockholders of the petitioner at $5 per share in conjunction with a similar offering by the Chase Bank of 100,000 shares of its new issue of stock to the same stockholders at $100 per share; and that the remaining 100,000 shares of additional stock to be authorized should "be set aside for issuance from time to time to the shareholders of The Mechanics & Metals National Bank of the City of New York, who shall deposit the shares of The Chase National Bank of the City of New York received by them on the consummation of said consolidation with the Bankers Trust Company, as Depositary, * * * in exchange, on the basis of share for share, for the stock of the corporation to be organized [Mechanics Securities Corporation], as contemplated in the Agreement of Consolidation entered into under date of February 11, 1926 * * *." A resolution was next adopted prescribing the form and ">*1180 wording of the amendments to the certificate of incorporation to effect the increase of petitioner's authorized capital stock from 200,000 to 400,000 shares for the purposes set forth in the preceding resolution. A further resolution was adopted calling a special meeting of the stockholders">*963 of the petitioner corporation for March 18, 1926, to consider and vote upon the proposals outlined.

On the same day, February 13, 1926, the Chase Bank and the petitioner corporation jointly sent notices to their stockholders of the special meetings to be held on March 18, 1926. The letter transmitting said notices reads in part as follows:

TO THE HOLDERS OF BANKERS TRUST COMPANY RECEIPTS FOR SHARES OF THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK AND CHASE SECURITIES CORPORATION:

Enclosed herewith is Notice of a Special Meeting of the Shareholders of The Chase National Bank of the City of New York and Notice of a Special Meeting of the Shareholders of Chase Securities Corporation.

The Special Meeting of the Shareholders of The Chase National Bank is called to consider and act upon an agreement for the consolidation of The Mechanics & Metals National Bank of the City of New York with The Chase National Bank, under the name and charter of the latter, entered into by a majority of the Board of Directors of each of said institutions.

As provided in the Consolidation Agreement (a copy of which is enclosed herewith), the amount of the capital, surplus and undivided profits">*964 of the consolidated bank is to be not less than approximately $79,000,000. The capital of the consolidated bank is to be $40,000,000, divided into 400,000 shares of $100 each, of which (a) 200,000 shares are to be allotted to the present shareholders of The Chase National Bank, or their assigns, being one share for each share held by them; (b) 100,000 shares are to be offered before the effective date of the consolidation at $100 per share to the present shareholders of The Chase National Bank, or to their assigns, pro rata in accordance with their holdings at the time of such offer; and (c) 100,000 shares are to be allotted to the present shareholders of The Mechanics & Metals National Bank, or to their assigns, being one share for each share held by them. The charter of The Chase National Bank is to be amended so as to provided for the above mentioned capital stock, as well as in any other respect required for the consolidation.

In order that the parity of ownership in the shares of The Chase National Bank and Chase Securities Corporation may be maintained, the Special Meeting of the Stockholders of Chase Securities Corporation has been called for the purposes of increasing">*965 from 200,000 to 400,000 shares the number of non par shares which it will be entitled to issue and for the other purposes set forth in the enclosed notice of such meeting. Of such additional number of shares, 100,000 shares are to be offered at $5 per share to the present shareholders of Chase Securities Corporation, or their assigns, pro rata in accordance with their holdings at the time of such offer.

As all of the shares of The Chase National Bank and Chase Securities Corporation now outstanding are represented by Bankers Trust Company receipts issued under the Deposit Agreement, dated March 21, 1917, arrangements have been made whereby holders of such Bankers Trust Company receipts shall be entitled to exercise the subscription rights above mentioned and to subscribe for one new share of The Chase National Bank and one new ">*1181 share of Chase Securities Corporation for every two shares of each of said corporations represented by the receipt or receipts registered in their respective names upon the books of Bankers Trust Company, as Depositary, at 3 P.M. on March 23, 1926 (or on such later date as the Boards of Directors of the respective corporations may determine in">*966 case final action shall not be taken by such special meetings of shareholders on the dates on which they are called to be held), at a cost of $105 for one share of The Chase National Bank and one share of Chase Securities Corporation, of which $100 will be received by The Chase National Bank and $5 by Chase Securities Corporation. Any shares of the two corporations not so purchased by the holders of Bankers Trust Company receipts will be disposed of at not less than the market price of said receipts to such person or persons, corporation or corporations, as their respective Boards of Directors shall deem proper. Assignable warrants covering subscription rights to the stock of both corporations will be mailed in due course after the shareholders' meetings. All such subscription rights will terminate if not exercised within fifteen days from the date of issuance of such warrants.

The remaining 100,000 of the additional shares to be authorized at said Special Meeting of shareholders of Chase Securities Corporation will be set aside for issuance to the shareholders of The Mechanics & Metals National Bank of the City of New York, who shall deposit the shares of The Chase National">*967 Bank received by them on the consummation of said consolidation, with Bankers Trust Company, as Depositary under the Deposit Agreement dated March 21, 1917, in exchange, on the basis of share for share, for the stock of the corporation to be organized as contemplated in the Consolidation Agreement.

* * *

The respective Boards of Directors of The Chase National Bank and Chase Securities Corporation believe that the consummation of the consolidation of The Mechanics & Metals National Bank with The Chase National Bank, and the issuance of the additional shares of Chase Securities Corporation on the basis outlined herein will be to the advantage of the holders of Bankers Trust Company receipts for shares of The Chase National Bank and Chase Securities Corporation, and all such holders are urged to take prompt action in sending in their proxies in order that such consolidation may be consummated at the earliest possible date.

By order of their respective Boards of Directors.

THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK,

By A. H. WIGGIN,

Chairman of the Board.

CHASE SECURITIES CORPORATION,

By E. R. TINKER,

Chairman of Executive Committee.

Also on February 13, 1926, the">*968 Mechanics Bank mailed to its shareholders notice of the special meeting to be held on March 18, 1926, to vote upon "the ratification and confirmation of the terms and conditions" of the proposed consolidation of the Chase Bank and the Mechanics Bank. The letter of notice contained the following:

* * *

Your Board of Directors recommends the consummation of the consolidation on the basis proposed in the belief that the best interests of the shareholders ">*1182 of this Bank will be materially enhanced thereby. The enlarged resources of the consolidated bank will assure it a commanding position in banking activities, and the interest which the shareholders of this Bank will be entitled to acquire in Chase Securities Corporation will give them the benefit of participating in the broader activities available to an established securities corporation. The consolidated bank will have twenty banking locations within the City of New York and three foreign branches, one at Havana, Cuba, one at Cristobal, Canal Zone, and one at Panama City, Republic of Panama.

* * *

The capital, surplus and undivided profits of the consolidated bank will be approximately $79,000,000. The capital">*969 of the consolidated bank is to be $40,000,000, divided into 400,000 shares of $100 each. Of this capital, 200,000 shares will be allotted to the present shareholders of The Chase National Bank, or their assigns, being one share for each share now held by them, and 100,000 shares will be allotted to the present shareholders of this bank, or their assigns, being one share for each share now held by them. The remaining 100,000 shares will be offered to the present shareholders of The Chase National Bank, or their assigns, for pro rata subscription by them at the price of $100 per share.

In addition, the shareholders of this Bank will be given the opportunity to acquire, without additional cost, one share of capital stock of no par value of Chase Securities Corporation for each share of stock of the consolidated bank to be allotted to them. To accomplish this result, assets of this Bank of an aggregate value of $500,000 will be transferred before the effective date of the consolidation to a corporation to be organized with an authorized capital of 100,000 shares, the shares of which corporation are to be distributable pro rata to the shareholders of this Bank after the consolidation">*970 has become effective. Shares of such corporation will be exchangeable, share for share, for stock of Chase Securities Corporation, provided the recipient authorizes the deposit of such stock of Chase Securities Corporation and an equal number of shares of stock of the consolidated bank under a deposit agreement with Bankers Trust Company as Depositary, dated March 21, 1917. This deposit agreement was adopted some years ago in order to preserve a parity of ownership in the shares of stock of The Chase National Bank and Chase Securities Corporation and thus enable the shareholders of The Chase National Bank at all times to share pro rata in the business activities of Chase Securities Corporation. All of the now outstanding 200,000 shares of stock of The Chase National Bank and of Chase Securities Corporation have been deposited under this deposit agreement and are represented by transferable certificates issued by Bankers Trust Company as such Depositary. The authorized number of shares of stock of Chase Securities Corporation will be increased from 200,000 to 400,000 in order that such deposit arrangement may be continued with respect to the 200,000 shares of additional bank stock. ">*971 In the opinion of your Board of Directors, an exchange upon these terms should be made by all shareholders of this Bank, as the stock of Chase Securities Corporation to be issued on such exchange will have a substantial value.

* * *

Under the plan above outlined, each shareholder of this Bank depositing with the Shareholders Committee, within the time prescribed for such deposit, the stock of this Bank now held by him will be entitled to receive, after the consolidation shall have become effective, for each share so deposited, one share of stock of The Chase National Bank of the par value of $100 and one share">*1183 of stock of Chase Securities Corporation without nominal or par value, represented by a transferable receipt issued to such shareholder by Bankers Trust Company as Depositary under the above-mentioned deposit agreement dated March 21, 1917.

* * *

* * * No action on your part is required other than to execute and return promptly such proxy, consent and power of attorney, and to forward to Bankers Trust Company by registered mail at the same time or as soon as possible thereafter your stock certificates endorsed in blank and properly witnessed.">*972

In case the plan above outlined shall not have become effective by May 1, 1926, or by such later date as the Shareholders Committee above mentioned may consent to in writing, the deposited shares of this Bank will be returned to the registered holders of such temporary receipts on the surrender thereof.

On March 6, 1926, the certificate of incorporation of the Mechanics Securities Corporation was filed in the office of the Secretary of State for the State of New York. Its powers were similar to those of the petitioner, the capital provided was $500,000, and the stock was divided into 100,000 shares with a par value of $5 per share. The Mechanics Securities Corporation was the new corporation which under the agreement of consolidation was to receive for its capital stock assets of the Mechanics Bank aggregating $500,000.

On March 18, 1926, special meetings of the stockholders of the Chase Bank, the petitioner, and the Mechanics Bank, called for the purposes previously outlined, were held and the proposals were ratified and confirmed and authority was given to carry them into effect. The stockholders of the Chase Bank voted to increase its authorized capital stock by 200,000">*973 shares, 100,000 of which were allotted to the shareholders of the Mechanics Bank, or their assigns, as provided in the agreement of consolidation, and the remaining 100,000 shares were to be offered at $100 per share to holders of deposit receipts representing outstanding shares of the Chase Bank stock and an equal number of shares of petitioner corporation. The right of the holders of such receipts to subscribe for such new or additional shares of Chase Bank stock was subject to the condition that each such subscriber should also and at the same time subscribe for an equal number of new shares of petitioner.

The purposes of the special meeting of the stockholders of the petitioner, held on March 18, 1926, the matters to be considered, and the business to be transacted were stated in the notice of the meeting, as follows:

Notice is hereby given that a special meeting of the stockholders of Chase Securities Corporation will be held at its office, No. 61 Broadway, Borough of Manhattan, City and State of New York, on March 18, 1926, at 3 o'clock in the afternoon, to consider and vote upon a proposal to increase from 200,000 to 400,000 the number of shares of capital stock, without">*974 nominal or par value, which said corporation may issue; proposals to amend the certificate of incorporation of said corporation in respect of the statements therein in respect of its ">*1184 capital and capital stock and in respect of the persons to whom, and the terms and conditions under which and the consideration for which, its stock may be issued and sold; the conditions under which said increase of capital stock may become effective and the terms or arrangements under which all or any part of such increased shares may be issued; and for the transaction of such other business as may properly come before said meeting.

In accordance with the purposes outlined, the stockholders of the petitioner approved and adopted the amendments to the certificate of incorporation contemplated by the notice of the meeting. One of the amendments reads as follows:

FIFTH: This corporation may issue and sell its authorized shares without par value from time to time for such consideration as, from time to time, may be fixed by the Board of Directors, and any and all shares so issued shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to this corporation">*975 or to its creditors in respect thereto. No shares of stock, now or hereafter authorized, shall be issued by this corporation unless, as part of the terms of or consideration for their issuance, they shall be made available in a manner satisfactory to the Board of Directors of this corporation, in its absolute discretion, for deposit with the depositary, or its successor, with which shares of stock of this corporation and of The Chase National Bank of the City of New York, or its successor, are deposited to insure their transfer together as provided in subdivision Third of this Certificate of Incorporation. No holder of shares of stock of this corporation shall be entitled as of right to subscribe for, purchase or receive any part of any new or additional issue of stock, whether now or hereafter authorized, unless such holder shall at the same time subscribe for, purchase or receive an equal number of shares of said Bank or its successor not theretofore deposited with such depositary, and shall deposit the same with such depositary for the purpose set forth above under the same terms and conditions as the shares of stock of this corporation then outstanding shall have been deposited, ">*976 with a like number of the new or additional shares of this corporation subscribed for by such stockholder.

Also in keeping with the purposes outlined in the notice, a resolution was adopted authorizing the proposed increase in petitioner's capital stock amounting to 200,000 shares, 100,000 of which were to be offered at $5 per share to the holders of deposit receipts covering stock of the petitioner and the Chase Bank, subject to conditions similar to those outlined above in connection with the issuance of new shares of the Chase Bank to the same parties. In the same resolution it was prescribed that the remaining 100,000 shares of new stock should be "set aside for issuance * * * in exchange, on the basis of share for share, for the stock of the corporation [Mechanics Securities Corporation] to be organized as contemplated in the Agreement of Consolidation entered into under date of February 11, 1926 * * *."

At a meeting held on April 7, 1926, the board of directors of the Mechanics Bank authorized the transfer and conveyance of its real estate to the Chase Bank, in accordance with the agreement of consolidation. The directors also adopted a resolution providing for ">*1185 ">*977 the transfer to the Mechanics Securities Corporation of a note of the Cedar Securities Corporation in the principal sum of $500,000 for the entire 100,000 shares of the authorized capital stock of the Mechanics Securities Corporation, which stock was to be issued pro rata to the shareholders of the Mechanics Bank. Preliminary to the adoption of the resolution it was stated that the committee of six appointed by the Chase Bank and the Mechanics Bank had approved the transfer of the note as the transfer of assets of the Mechanics Bank of an aggregate value of $500,000, called for by the provisions of paragraph 4 of the agreement of consolidation.

On April 9, 1926, the board of directors of the Mechanics Securities Corporation approved the issuance of its 100,000 shares of authorized capital stock pro rata to the shareholders of the Mechanics Bank in accordance with the plan mentioned above.

On April 10, 1926, at 12 o'clock noon, the consolidation of the Chase Bank and the Mechanics Bank became effective by the issuance of the certificate of the Comptroller of the Currency.

At the close of business on April 10, 1926, capital, surplus, and undivided profits of the Chase Bank and">*978 the Mechanics Bank before the merger and the consolidated bank after the merger, as shown on their books, were as follows:

	Before merger
	Mechanics	Chase	Total
Capital	$10,000,000.00	$20,000,000.00	$30,000,000.00
Surplus	10,000,000.00	15,000,000.00	25,000,000.00
Undivided
profits	1 5,605,037.77	12,535,531.29	18,140,569.06
	25,605,037.77	47,535,531.29	73,140,569.06

	After merger
	New capital	Totals as adjusted
Capital	$10,000,000.00	$40,000,000.00
Surplus		25,000,000.00
Undivided
profits		14,053,150.19
	10,000,000.00	79,053,150.19

The undivided profits of the consolidated bank are shown above as $14,053,150.19, whereas total undivided profits of the two banks before the merger are shown at $18,140,569.06. The reduction was brought about by a net charge against the undivided profits of the consolidated bank in the amount of $4,087,418.87. In effecting this reduction $4,500,000 was charged against the total undivided profits of the consolidated bank and credited to suspense, while the undivided">*979 profits of the Mechanics Bank, as carried into the undivided profits of the consolidated bank, were increased by $412,581.13, representing unearned discount in the amount of $394,122.13 and reserves for building and expenses in the amounts of $975 and $17,484, respectively. Accordingly, the closing entry for undivided profits on the books of the Mechanics Bank was $5,605,037.77, while the entry therefor on the books of the consolidated bank was $6,017,618.90.

">*1186 Upon consolidation of the Chase Bank and the Mechanics Bank, the capital stock of the consolidated bank consisted of 400,000 shares having a par value of $100 each. Of that capital stock, 200,000 shares had been allotted to the shareholders of the Chase Bank, or their assigns, and 100,000 had been offered to the same stockholders, or their assigns, for subscription at $100 per share and were duly issued according to the terms of the offer. The remaining 100,000 shares had been allotted and were issued to the shareholders of the Mechanics Bank, or their assigns.

Of the 200,000 of new or additional shares of stock authorized by the petitioner, 100,000 were issued to petitioner's stockholders, or their assigns, ">*980 at $5 per share. In accordance with the authorization and direction contained in the resolutions adopted by petitioner's stockholders, the remaining 100,000 shares of new stock were set aside for issuance to the stockholders of the Mechanics Bank under the terms of the exchange agreement and from time to time were so issued. Between April 12, 1926, when the first exchange of shares was made, and June 16, 1926, 95,493 of the 100,000 shares of petitioner's stock set aside for exchange for the stock of the Mechanics Securities Corporation had been so issued and exchanged, and on or about June 16, 1926, a temporary certificate for the 4,507 shares remaining was issued by petitioner to the committee acting for the Mechanics Bank stockholders in order that the exchange of the entire 100,000 shares might be expedited and completed. From time to time thereafter until December 27, 1927, permanent certificates were issued by petitioner against the temporary certificate for the 4,507 shares, and on or about the date last mentioned all of the said 100,000 shares of petitioner had been exchanged for the entire 100,000 shares of the Mechanics Securities Corporation.

The permanent receipts">*981 issued by the Bankers Trust Co. covering units consisting of one share of Chase Bank stock and one share of petitioner's stock were traded in by dealers and brokers in "over the counter" transactions. Between April 3 and June 26, 1926, the quoted prices per unit ranged from a low of $405 to a high of $435. These receipts were also listed on the New York Stock Exchange.

On May 20, 1926, petitioner's assets exceeded its liabilities by $21,427,732.53. Listed among its assets on that date were 88,696 shares of Mechanics Securities Corporation stock, being the number of shares of that corporation which had been exchanged up to that time for shares of the petitioner under the exchange agreement of February 11, 1926. The shares were carried on the books at par, or a total of $443,480. During the period from April 10, 1926, to December 27, 1927, the excess of petitioner's assets over liabilities was at no time less than $21,082,183.76.

">*1187 For the five calendar years proceding 1926 the net increase in the profit and loss account of petitioner, before deduction for dividends declared, was as follows:

1921	$1,745,089.76
1922	1,803,791.59
1923	1,606,105.14
1924	1,674,329.94
1925	2,850,421.96

">*982 For the five calendar years preceding 1926, dividends paid by petitioner were as follows:

1921	$650,000
1922	800,000
1923	800,000
1924	800,000
1925	800,000

At no time during the period of ownership by petitioner of the stock of the Mechanics Securities Corporation did petitioner file a consolidated income tax return with that corporation, or any other corporation.

In October 1928 the petitioner caused the dissolution of the Mechanics Securities Corporation and as its sole stockholder received a complete and final liquidating dividend in the amount of $444,816.94, in cash. Prior to October 1928 the stock of the Mechanics Securities Corporation was carried on the books of the petitioner in its investment account at $500,000. After its dissolution petitioner debited its cash account with $444,816.94, the amount received, and its profit and loss account with $55,183.06, and credited its investment account with $500,000.

In its income tax return for 1928 the petitioner claimed as a loss the amount of $4,307,066.58, represented as the difference between its cost of the 100,000 shares of the Mechanics Securities Corporation stock and the amount received">*983 upon the dissolution of that corporation. Petitioner reported net income in the amount of $463,657.52, in respect of which it paid to the collector a tax of $55,638.90.

The respondent determined that the cost of the Mechanics Securities Corporation stock to petitioner was $500,000 and thereby reduced the loss deduction from $4,307,066.58, as claimed, to $55,183.06.

The cost to petitioner of the stock of Mechanics Securities Corporation was not in excess of $500,000.

At the close of the hearing counsel for respondent filed a motion claiming an additional deficiency in the amount of $6,621.07, alleging that the organization and dissolution of the Mechanics Securities Corporation did not give rise to a recognizable loss in any amount.

">*1188 OPINION.

TURNER: In section 115(c) of the Revenue Act of 1928, ¹ it is provided that amounts distributed in complete liquidation of a corporation are to be treated as in full payment in exchange for the stock of the corporation liquidated and the gain or loss to the distributee resulting from such liquidation is to be determined under section 111. In section 111(a) ² it is provided, subject to certain exceptions not here pertinent, ">*984 that the loss from a sale or other disposition of property is the excess of the basis provided in section 113 over the amount realized upon such sale or disposition. The amount realized by the petitioner upon the liquidation of the Mechanics Securities Corporation amounted to $444,816.94 and is not in dispute. The parties are in disagreement, however, as to the basis for determining the loss, if any, sustained.

">*985 Section 113(a) ³ of the act provides in part that "the basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property." That section contains numerous exceptions to the general rule just stated, but neither party contends that any of the exceptions are applicable here.

The shares of Mechanics Securities Corporation stock were acquired upon issuance by petitioner of 100,000 shares of its stock and, while the stock so issued had no cost to and represented no outlay on the part of petitioner, it has been held and may be regarded as settled that the cost to a corporation of property acquired through the issuance of its capital stock is the fair market value of such stock at the time of issue. ">*986 ; ; ; and .

The petitioner carried the stock of the Mechanics Securities Corporation on its books at $500,000, and upon liquidation of that corporation entered therein a loss of $55,183.06. In making its return for ">*1189 1928, however, a deduction of $4,307,066.58 was claimed as the amount of the loss sustained, the basis for the claim being that the 100,000 shares of petitioner's stock issued for the stock of the Mechanics Securities Corporation had at the time of issue a fair market value of $4,751,883.52. In the petition it is alleged that the fair market value of the stock in question was, at the time of issue, $8,280,549.90, but on brief the claim now is that the fair market value of the said stock was not less than $5,270,545.94 and that that amount constitutes the proper basis, under section 113(a), supra, for computing petitioner's loss.

The parties stipulated that during the period from April 10, 1926, to December 27, 1927, when the issuance of petitioner's">*987 100,000 shares had been completed and all of the shares of the Mechanics Securities Corporation stock had been received, the excess of petitioner's assets over liabilities was at no time less than $21,082,183.75. The minimum amount of $5,270,545.94 now claimed as the fair market value of the 100,000 shares of petitioner's stock here under consideration was arrived at by prorating the above amount of net assets to the entire 400,000 shares of petitioner's authorized capital stock, including the 100,000 shares with which we are concerned. In support of the value claimed petitioner points to its earnings record and to the fact that during the period between April 3, 1926, and June 26 of the same year, when 95,493 of the 100,000 shares were issued, the quoted bids for units composed of one share of petitioner's stock and one share of Chase Bank stock ranged from $403 to $435 per unit. Petitioner also relies on the answers given by one of its witnesses called as an expert, who testified that in his opinion that stock of the corporation described in a hypothetical question propounded by petitioner's counsel, and obviously intended to be comparable to petitioner, had a fair market value">*988 on the assumed date ranging detween $50 and $100 per share.

It is the position of the respondent, however, that, since petitioner was at no time free to offer the stock in question on the open market but was restricted in the use of said shares so that it could receive upon issuance only the stock of the Mechanics Securities Corporation, the fair market value of petitioner's shares was necessarily limited to $500,000, the accepted value of the property received, and that the loss on liquidation of the Mechanics Securities Corporation could under no circumstances exceed the sum of $55,183.06 which was allowed in the notice of deficiency.

The petitioner does not make the broad contention that under no circumstances may the value of property received by a corporation through the issuance of its stock be considered in determining the fair market value of the stock so issued, but, relying particularly on language appearing in , and MacCallum">*1190 , contends that in cases where the issuing corporation already has other property and other shares outstanding, the fair market value of the stock">*989 issued may not be measured by the value of the property received, and, with reference to the instant case, that "the stock of Mechanics Securities Corporation constituted but a small portion of all the assets of Petitioner, and could not be the measure of the value of any part of Petitioner's stock."

Petitioner distinguishes ;; ; and , from the instant case, pointing out that in those cases the value of the property received was recognized as the best evidence of the fair market value of the stock issued, because all of the stock of the issuing corporation was issued for the property and no other evidence of the fair market value of the stock was available. While those cases may properly be limited to the proposition stated, none of them contains any pronouncement to the effect that the fair market value of the property received under other circumstances upon the issuance of corporate stock is to be disregarded in determining the fair market">*990 value of the stock so issued. Nor do those cases contain any pronouncement to the effect that under no circumstances other than those stated may the fair market value of the property received by a corporation in exchange for its stock be found to be the best evidence of the fair market value of the stock exchanged. It is true , did contain the following language, quoted by petitioner in its brief:

Although it has been held that where a corporation issues all its shares for property, the value of the shares is measured by the value of the property, this is merely because the value of the property received is the only available measure of the cost. Obviously it has no application where many shares were already outstanding representing other property and such shares have a determinable value.

The petitioner did not quote the next succeeding sentence, however, which reads "What the value is in any case is to be determined by evidence and a formula is only recognized at law as a makeweight or as a last resort." If therefore it appears from the record that the value of the property received, upon the issuance by a corporation of certain">*991 of its shares of stock, is the best evidence of the fair market value of those shares at the time of issue, that evidence should be applied and the fair market value of the shares of stock issued determined accordingly, even though at the time of issuance the corporation already owned substantial property of value and had other shares of stock outstanding.

As we have previously pointed out, the 100,000 shares of petitioner's stock with which we are concerned had no cost to petitioner ">*1191 and represented no outlay on its part, and so long as those shares remained unissued they imparted to no one the right to participate in the corporate profits, to vote the said shares in any corporate meeting, or to share in the corporate assets on liquidation. Before such rights could arise, those shares must have been issued and outstanding. Accordingly, the only value such shares could have in the hands of petitioner before or at the time of issue was the value of the use to which they could be put, or, in other words, the value of such shares is to be measured by the amount of money or the value of the property which might reasonably be expected upon their disposition. According">*992 to the respondent, the use of the shares in the instant case was limited and restricted to issuance for the stock of the Mechanics Securities Corporation, a fact which petitioner contends is unimportant and should be disregarded. The substance of petitioner's argument is to be found in the following quotation from its brief:

* * * Petitioner had limited itself to such consideration by contract. But that fact is unimportant. Either the corporation agrees to exchange its stock for property or it makes such an exchange without an agreement. In either case the result is the same. The only thing it receives for its stock is the property contracted for or actually received. In the one case, it limits itself by a contract; in the other, by an established fact.

The cost of what is received is the value of what is given up therefor. The cost of what is received is not determined by the value of what is received. Where a corporation issues stock for property, the value of the stock is determined, under the decisions of the Board and of the courts, not by the value of the property received, but by reference to the market or intrinsic value of the stock given up, taking into account, ">*993 among other things, all the assets and all the liabilities of the corporation * * *. Of course, if a corporation issues all its stock at the one time for property, the value of such property may be the only measure of the value of the stock, but this is not the instant case. In this case, the stock of Mechanics Securities Corporation constituted but a small portion of all the assets of Petitioner, and could not be the measure of the value of any part of Petitioner's stock. * * *.

To say, therefore, that, * * * the fair market value of the 100,000 shares of stock of Petitioner could not be in excess of the value of the shares of stock of Mechanics Securities Corporation is to assert that, in every case where a corporation issues its shares of stock in exchange for property, the fair market value of its shares of stock is to be determined by the value of the property received, and that all prior determinations of the Board and the courts as to the manner in which the fair market value of such shares is to be determined were erroneous and are overruled.

The above statement discloses a failure on the part of petitioner's counsel to consider all of the facts in the">*994 instant case and a tendency to dismiss certain significant facts as unimportant. We are not here dealing with a corporation which, free of limitations and restrictions, was issuing previously authorized shares of stock on the open market for cash or property. In the absence of restrictions ">*1192 and limitations, a corporation is in a position to seek the best price obtainable and the price which a willing buyer, not required to buy, might reasonably be expected to pay would undoubtedly be determined with due regard to the assets, liabilities, earnings, records, and future business prospects of the corporation and to the price at which other shares of the corporation might be selling on the market, and if under such circumstances the directors exercised bad judgment in disposing of the stock, or, for some purpose in respect of which they might still exercise discretion, issued the shares for property having a value much lower than the price which could have been obtained, it could not reasonably be said that the cost of the property received, or in other words the fair market value of the stock issued, was limited to the value of the property received. In the instant case">*995 the use of the shares in question had been fixed and determined prior to their authorization and the stockholders in making the authorization tagged and earmarked them for the use to which they were put. At no time after authorization was the petitioner free to offer any of the shares to the public and at all times from and after February 11, 1926, more than one month before their authorization, the use of those shares was limited and restricted to issuance in accordance with the terms of the exchange agreement and in connection with the consolidation of the Mechanics Bank and Chase Bank. The said shares were definitely tied to the Chase Bank stock issued to the shareholders of Mechanics Bank by petitioner's certificate of incorporation, as amended, which prohibited the issuance of the shares "unless, as a part of the terms of or consideration for their issuance" they should be made available for deposit with a similar number of shares of Chase Bank. By reason of the restrictions outlined, nothing could be acquired through the issuance of petitioner's shares which was outside the plan of consolidation, and the petitioner was precluded from seeking the price which would otherwise">*996 have been obtainable if the elements and factors which normally control the selling price of stock could have attached to the shares under consideration. The fair market value contended for by petitioner may be a fair indication of the price that could have been expected if the shares had been free of restrictions. There were restrictions, however, and if they were such as to affect the fair market value of the stock so issued those restrictions should be given such weight in determining its fair market value as sound judgment indicates. In this connection petitioner's own witness, called as an expert, testified on cross-examination that where the shares of stock of a corporation may not be offered for sale on the open market but must be used only in exchange for specifically designated property, the shares of stock, in his opinion, would have a fair market value equal to and not in excess of the value of the ">*1193 property for which they must be issued. Cf. ; .

We do not consider it necessary, however, to determine whether or not the restrictions in the instant case">*997 were such as to limit the fair market value of the stock at the time of issuance to the value of the Mechanics Securities stock received, for in the view we take of the transaction the cost of Mechanics Security stock to the petitioner was not in excess of $500,000 even though it be assumed and conceded that the fair market value of the 100,000 shares of petitioner's stock had a fair market value of $5,270,545.94 at the time of issue, as petitioner contends. Both parties have proceeded with the hearing under the assumption that the petitioner issued the said shares solely for all of the authorized capital stock of the Mechanics Securities Corporation, and if that assumption is correct, the total amount determined as the fair market value of the said 100,000 shares of petitioner represents the cost of the Mechanics Securities stock. In our opinion, however, the facts of record indicate that the assumption is not sound but that the consideration for the issuance of petitioner's 100,000 shares was not limited to the Mechanics Securities stock actually received, but included other property as well, and the cost to petitioner of the Mechanics Securities stock is only such part of">*998 the fair market value of the said 100,000 shares as is properly allocable thereto.

While it is true that the only property actually received by and transferred to petitioner upon the issuance of the said shares of its stock was the stock of Mechanics Securities Corporation and the literal wording of the exchange agreement, standing alone, supports the assumption that petitioner's stock was issued solely for Mechanics Securities stock, the results must nevertheless be determined with due reference to all circumstances surrounding the issuance of said shares, and the controlling effect of the merger of the Mechanics Bank with the Chase Bank upon the issuance by petitioner of its shares of stock to the shareholders of the Mechanics Bank may not be ignored. In the first place, it is obvious that the stockholders of the Mechanics Bank on the one hand and the stockholders of petitioner and Chase Bank on the other were substantial and real parties in interest, and the transaction here under consideration was designed not only to require the transfer of assets between the corporations involved but also to effect a complete readjustment of stockholdings and stock interests, between the">*999 two groups of stockholders, in the assets previously held and the businesses previously conducted by the Mechanics Bank, the Chase Bank, and the petitioner. The result desired and accomplished was that upon transfer of the assets and business of the Mechanics Bank to the Chase Bank and the petitioner the stock of the Chase Bank and the petitioner should be ">*1194 held 75 percent by their existing stockholers and 25 percent by the stockholders of the Mechanics Bank.

With the above objective in mind, each of the corporations, namely, the petitioner, the Chase Bank, and the Mechanics Bank, submitted to its stockholders for consideration and approval a proposal whereby all of the assets of the Mechanics Bank, except assets having an aggregate value of $500,000, should be transferred to the Chase Bank for 25 percent of the stock of Chase Bank, which stock was to be issued to the stockholders of Mechanics Bank. The excepted assets were to go to a new corporation for all of its authorized stock, which stock was to be transferred to petitioner and petitioner in turn was to issue 100,000, or 25 percent, of its authorized shares also to the Mechanics Bank shareholders. While the">*1000 agreement of consolidation and the exchange agreement required the approval or joining of only two-thirds of the Mechanics Bank shareholders, the record indicates that all of the shareholders voted approval or later joined in the proposal, as did all of the shareholders of Chase Bank and petitioner.

The Mechanics Securities Corporation was accordingly organized and its entire 100,000 shares of authorized capital stock were issued pro rata to the shareholders of the Mechanics Bank, subject to the provisions of the exchange agreement to the effect that the stock so received should be exchanged for 100,000 shares of petitioner's stock. By the terms of the exchange agreement, however, petitioner was bound to authorize and issue its said 100,000 shares of stock for the stock of the Mechanics Securities Corporation only if the consolidation of the Chase Bank and Mechanics Bank should be effected as provided in the agreement of consolidation. It is also significant to note that the Mechanics Bank, in calling the meeting of its stockholders to consider and act upon the merger with the Chase Bank and related and dependent transactions, urged approval of the consolidation of the two banks">*1001 under the proposed plan and obviously as an inducement to such approval pointed out that the shareholders of the Mechanics Bank would be given the opportunity to acquire "without additional cost, one share * * * of Chase Securities Corporation for each share of stock of the consolidated bank allotted to them", and further that the stock of petitioner would "have a substantial value." It was explained that the acquisition of petitioner's stock was to be accomplished through the use, as previously outlined, of $500,000 of Mechanics Bank assets to be withheld under the agreement of consolidation for that purpose. From the above it is at once apparent that the consolidation of the Mechanics Bank with the Chase Bank was part of the consideration for the agreement on petitioner's part to issue 100,000 of its shares to the stockholders of ">*1195 the Mechanics Bank and the receipt of those shares by the Mechanics Bank stockholders was part of the consideration for their approval of the merger of that bank with the Chase Bank.

Even though petitioner was restricted as to the use of the said 100,000 of its shares of stock here under consideration and those restrictions may have had">*1002 the effect of limiting their fair market value, it is nevertheless true that those shares, when issued, represented 25 percent of the total authorized and outstanding stock of a prosperous corporation, a corporation which owned net assets amounting to at least $21,082,183.76 and for each of the five years preceding had net profits in excess of $1,500,000 and for each of the four preceding years had paid dividends amounting to $800,000. That petitioner would bind and restrict itself to the authorization of additional shares and upon such authorization to the issuance of the shares so authorized to the extent of 25 percent of its total authorized shares and receive for itself property having a value of only $500,000 is, to use language of petitioner's counsel, "obviously to state something that requires an explanation." The explanation offered was that, to maintain the joint ownership of petitioner's stock with the Chase Bank stock, the terms of exchange had to be made "attractive" so as to induce the shareholders of the Mechanics Bank to become shareholders of petitioner at the same time they became stockholders of the Chase Bank.

In our opinion, however, the real basis for the">*1003 terms on which petitioner's shares were issued goes much deeper than a mere desirability of maintaining joint and equal ownership of the stock of the Chase Bank and petitioner. The ownership of petitioner's shares and the maintenance of such joint and equal ownership obviously had been both desirable and profitable to the shareholders of the Chase Bank and there is nothing to indicate that they would be less attractive to the shareholders of the Mechanics Bank. If the maintenance of such joint and equal ownership had been the controlling factor the most logical method of accomplishing that result would have been through the proration of the assets of the Mechanics Bank to petitioner and the Chase Bank so that the Mechanics Bank would furnish the same percentage of capital to each corporation and through the issuance of stock to the Mechanics Bank stockholders on the basis of the percentage so determined. For reasons best known to themselves, however, the parties determined that assets of the Mechanics Bank totaling $26,017,618.90, according to entries on the books of the consolidated bank, should be acquired by the Chase Bank, leaving only the excepted assets of $500,000 for petitioner. ">*1004 As a result of this arrangement and as disclosed by the table in the ">*1196 margin ⁴">*1005 we find that the Mechanics Bank was furnishing approximately 33 percent of the net assets of the consolidated bank and its stockholders were receiving only 25 percent of the stock of such bank while the Chase Bank was furnishing only slightly more than 67 percent of the net assets and its stockholders were receiving 75 percent of the stock. In this connection it is also significant to note that while the stockholders of the Mechanics Bank were supplying approximately 33 percent of the net assets of the consolidated bank and were receiving only 25 percent of its stock and were supplying only slightly more than 2 percent of the net assets of petitioner for which they were likewise receiving 25 percent of its stock, they were nevertheless supplying only slightly more than 26 percent of the net assets of the consolidated bank and petitioner, considered jointly, and petitioner and the Chase Bank were furnishing approximately 74 percent of the aggregate net assets of the two corporations. ⁵

">*1006 We have previously noted the fact that the petitioner was bound to issue its stock to the shareholders of the Mechanics Bank only upon the condition that the consolidation of that bank with the Chase Bank should be effected and that one of the inducements to the shareholders of the Mechanics Bank for approving the proposed consolidation whereby they were to receive 25 percent of the ">*1197 shares of the consolidated bank while furnishing approximately 33 percent of the assets of such bank, was that the said shareholders were to receive "without additional cost" 25 percent of the stock of the petitioner. In the light of such facts, the logical conclusion is that petitioner's said 100,000 shares of stock were not issued solely for the stock of the Mechanics Securities Corporation, but in addition to such stock acquired for itself, petitioner acquired for the benefit of its shareholders, who were also shareholders of the Chase Bank, additional assets for that bank. Analysis of the figures shown by the tables in the margin indicates that the property so acquired by the petitioner upon the issuance of its said shares corresponds in value to the fair market value claimed by petitioner">*1007 for the stock issued. It does not follow, however, that a finding that petitioner's shares had a fair market value equal to the amount contended for leads to a finding that the cost to petitioner of Mechanics Securities Corporation stock exceeded $500,000, as found and determined by the respondent. The petitioner's claim is that the 100,000 shares of stock in question had a fair market value of $5,270,545.94 and the percentages set forth above indicate that the value of the Mechanics Securities stock and other assets acquired by petitioner on behalf of its stockholders as additional capital for the Chase Bank approximated the same amount. In the light of these facts, we conclude that the portion of the fair market value of petitioner's said shares which may be determined as the cost of the Mechanics Securities stock was not in excess of $500,000, and the loss to petitioner on liquidation of the Mechanics Securities Corporation in the amount allowed by respondent in his determination of the deficiency herein is approved. Cf. .

At the conclusion of the hearing, the respondent requested permission to file an amended answer, claiming">*1008 an additional deficiency of $6,621.97. The basis for this claim is neither definitely nor clearly stated. It appears, however, that there is some thought that the Mechanics Securities Corporation, similar to the Averill corporation in , was not organized for a business purpose and for that reason may not be recognized for income tax purposes, with the result that under the statute no recognizable loss was sustained upon its liquidation. If that is the basis of the claim for additional deficiency, the claim must be denied. In the case of such a claim, the burden of proof is upon the respondent, and no proof whatever was offered to show that the Mechanics Securities Corporation was not intended as a business corporation or that it did not in fact transact any business during the two years of its existence. The amended answer makes some reference to the Mechanics Securities Corporation as being only a conduit through ">*1198 which the shares of the petitioner were transferred to the Bankers Trust Co. for the benefit of the stockholders of the Mechanics Bank. The purpose of that statement obviously can not be determined, ">*1009 since the statement is inaccurate on its face. The Mechanics Securities Corporation never at any time, so far as the records show, owned or held any of the stock of the petitioner and could not therefore have been a conduit through which those shares were passed to the Bankers Trust Co. for the benefit of the shareholders of the Mechanics Bank. The claim for additional deficiency accordingly is denied.

Reviewed by the Board.

Decision will be entered under Rule 50.

SMITH did not participate in the consideration of or decision in this report.

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Footnotes

• 1. Does not include $88,173.05 of branch profits shown as transferred on April 12th. ↩

• 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

  * * *

  (c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * * ↩

• 2. SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.

  (a) COMPUTATION OF GAIN OR LOSS. - Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized. ↩

• 3. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.

  (a) PROPERTY ACQUIRED AFTER FEBRUARY 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * * ↩

• 4. See the following table:

  	Net assets prior to merger,
  	April 10, 1926	Total net assets after merger
  Chase Bank	Including $10,000,000 new capital and excluding $4,500,000 charged against total undivided profits of the merged banks and credited to suspense. 1 $53,035,531.29	(67.0884476 plus %)
  Mechanics Bank	Includes $412,581.13 credited to total undivided profits of the merged bank in excess of the closing figure as shown by Mechanics' books. 2↩ $26,017,618.90	(32.9115523 plus %)
  Consolidated Bank		$79,053,150.19 (100%).

• 5. See the following table:

  	Net assets
  	furnished	Total
  Chase Bank	$53,035,531.29
  Petitioner	21,082,193.76
  		$73,117,715.05 (73.64979+%)
  Mechanics Bank	26,017,618.90
  Mechanics Securities
  Corporation	500,000.00
  		26,517,618.90 (26.35020+%)
  Grand total		100,635,333.95 (100%)

  NOTE. - The above table is believed to be the nearest approximation of percentages that can be worked out from the facts of record. As to Chase Bank and Mechanics Bank the values shown apparently represent the judgment of the committee of six composed of three stockholders from each bank. The exact amount of net value of petitioner's assets on April 10, 1926, and prior to the receipt of any of the Mechanics Securities Corporation stock on April 12, 1926, is not shown. According to the stipulation of the parties, however, it was not less than $21,082,183.76, the amount used in the above table. It is not at all unlikely that if the exact amount were known the percentage results as between the stockholders of the Chase Bank and the petitioner on the one hand and the stockholders of the Mechanics Bank on the other might be even closer to 75 and 25 than the percentages shown in the table. ↩