Johnston v. Commissioner

*185 This is a proceeding for the redetermination of a deficiency in income tax for 1920 in the amount of $1,026.83. The allegation of error stated in the petition is that the Commissioner erred in including *186 as taxable income a so-called profit arising from the exchange of stock of one corporation for stock in a reorganized company.

FINDINGS OF FACT.

Mrs. E. V. Johnston, a resident of Wichita, Kans., died at Wichita, September 25, 1924. This proceeding is brought by her son, R. H. Johnston, heir at law.

Mrs. E. V. Johnston was the owner of 136 1/2 shares of capital stock of the Peoples Cleaning & Laundry Co. on January 2, 1920, which was acquired by gift from her husband during the year 1919. In 1920 the Southwest Laundries & Cleaning Co., a Kansas corporation, was organized with an authorized capital stock of $200,000 to take over the business and assets of the Peoples Cleaning & Laundry Co. and of the Domestic*3592 Laundry Co. On January 2, 1920, the directors of the Southwest Laundries & Cleaning Co. voted to purchase from the stockholders of the Peoples Cleaning & Laundry Co. all of its capital stock for which the stockholders received notes, payable in 60 days from date, of the Southwest Laundries & Cleaning Co. A stockselling campaign was conducted by the Southwest Cleaning & Laundries Co. during the early part of 1920, but only 41 1/4 shares of stock were sold, these sales being made to friends of the promoter. At the time the notes above referred to were issued by the new company the only assets of the company were the stock of the two companies which were to be taken over. The fair market value of those assets was $82,301.14. The reorganized company not being able to sell more than a nominal amount of its capital stock, the holders of the notes of the new company accepted shares of stock of the Southwest Laundries & Cleaning Co. in exchange therefor. The fair market value of the 136 1/2 shares of the Peoples Cleaning & Laundry Co. owned by Mrs. E. V. Johnston was on January 2, 1920, $13,650. In exchange for her shares of stock she received a note from the Southwest Laundries & Cleaning*3593 Co. of the face value of $24,331.75 and in exchange for the note received 243.3175 shares of stock of the Southwest Laundries & Cleaning Co. This stock had a fair market value at the date of receipt of $60 per share and the fair market value of the total number of shares received was $14,599.50.

OPINION.

SMITH: The sole question for determination in this proceeding is the profit, if any, realized by Mrs. E. V. Johnston as a result of exchanging 136 1/2 shares of stock in the Peoples Cleaning & Laundry Co. for a note of $24,331.75 issued by the Southwest Laundries & Cleaning Co. The ability of the Southwest Laundries & Cleaning Co. to pay the note depended upon the success of the company in *187 selling sufficient capital stock at par to meet the notes. It was unable to do so. Mrs. Johnston, together with all the other holders of the notes of the Southwest Laundries & Cleaning Co. received shares of stock of that company in settlement of the note. These shares of stock had a fair market value not in excess of 60 per cent of the par value. The fair market value of the entire number of shares received by Mrs. Johnston was $14,599.05. The profit realized by her from*3594 the transaction was $949.05.

Judgment will be entered under Rule 50.