Brazoria Inv. Corp.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Jun 29, 1953
20 T.C. 690 (U.S.T.C. 1953)
20 T.C. 690T.C.

Docket Nos. 23611 23612 23613 35604.

1953-06-29

BRAZORIA INVESTMENT CORPORATION, IVAN H. GREER, TRANSFEREE, PETITIONER, ET AL., 1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fred L. Williams, Jr., Esq., and Carlos B. Masterson, Esq., for the petitioners. Paul M. Newton, Esq., and J. Marvin Kelley, Esq., for the respondent.


1. Amounts includible in the unadjusted bases to be employed in computing the adjusted bases of 191 houses constructed by Brazoria for determining gain and depreciation thereon, determined.

2. Held, in computing the amount of gain realized by Ivan H. Greer and his wife from the liquidating dividend received from Brazoria in 1946, the cost basis of the stock held therein by Greer is the amount actually paid by him for the stock. Fred L. Williams, Jr., Esq., and Carlos B. Masterson, Esq., for the petitioners. Paul M. Newton, Esq., and J. Marvin Kelley, Esq., for the respondent.

The respondent determined deficiencies in income and declared value excess-profits taxes of petitioners, as follows:

+---------------------------------------------------------------------------+ ¦Docket No.¦Year ¦Kind of tax ¦Deficiency¦ +----------+-----------------------+-----------------------------+----------¦ ¦23611 ¦Jan. 1 to Dec. 19, 1946¦Income ¦$21,519.46¦ +----------+-----------------------+-----------------------------+----------¦ ¦23612 ¦1946 ¦Income ¦2,787.65 ¦ +----------+-----------------------+-----------------------------+----------¦ ¦23613 ¦1946 ¦Income ¦2,787.65 ¦ +----------+-----------------------+-----------------------------+----------¦ ¦35604 ¦1945 ¦Income ¦3,477.23 ¦ +----------+-----------------------+-----------------------------+----------¦ ¦ ¦ ¦Declared value excess-profits¦2,014.83 ¦ +---------------------------------------------------------------------------+

In his answer to the amended petition in Docket No. 23611, respondent affirmatively alleged an alternative deficiency in income tax of Brazoria Investment Corporation for the taxable year ended December 19, 1946, in the amount of $15,827.79. This allegation was complementary to the deficiency determined in Docket No. 35604 for the year 1945, and together formed an alternative to respondent's position in the notice of deficiency on which the proceeding in Docket No. 23611 is based.

The respondent, on brief, now concedes and abandons the alternative position taken by him in Docket No. 35604 and his affirmative allegations made in Docket No. 23611, and set out above, insofar as the liability of Brazoria Investment Corporation and its transferees is concerned.

Certain of the adjustments relating to the tax liability of the transferor, Brazoria Investment Corporation, are not here contested, and, together with others, have apparently been abandoned. Petitioners Ivan H. and Lita H. Greer admit their liability as transferees. Those items conceded, admitted, or abandoned, will be reflected in a recomputation under Rule 50.

The parties have stipulated that in determining the gain or loss of Ivan H. and Lita H. Greer upon the dissolution and distribution of the assets of Brazoria Investment Corporation, the value of those assets so distributed shall be reduced by any additional tax liability and interest thereon finally determined against the corporation.

There remain two issues: (1) The adjusted bases to be used in determining depreciation and gain on certain houses and (2) the gain realized from a liquidating dividend.

FINDINGS OF FACT.

Those facts stipulated by the parties are so found and made a part hereof.

Petitioners Ivan H. and Lita H. Greer are individuals who are husband and wife, with their principal residence at Lake Jackson, Texas. They filed joint income tax returns for the calendar years 1944 and 1945 and separate returns on the community property basis for the calendar year 1946. Their returns were prepared on the basis of cash receipts and disbursements and were timely filed with the collector of internal revenue for the first district of Texas. For convenience, Ivan H. Greer is hereinafter referred to as petitioner.

Brazoria Investment Corporation (hereinafter sometimes referred to as Brazoria) was organized on December 14, 1942, by Ivan H. Greer, his father, Alfred W. Greer, and R. D. Looney. It was duly chartered under the laws of the State of Texas on December 15, 1942. Its corporate income and declared value excess-profits tax returns for the calendar years 1944 and 1945 and its corporate income tax return for the taxable year ended December 19, 1946, were timely filed with the collector of internal revenue for the first district of Texas, at Austin.

Brazoria was organized with an authorized capital stock of $40,000, all of which was subscribed and one-half of which was paid in when the charger was issued. Of the original 200 shares of stock so issued, 198 shares were issued to Looney and 1 share each to Ivan and A. W. Greer. The $20,000 originally invested in cash was provided by Looney. Petitioner loaned certain of his personal building equipment to the corporation for its use. The title thereto was not transferred and deductions for depreciation on such equipment were taken on petitioner's income tax returns for each of the years involved.

Petitioner and his father, A. W. Greer, and Looney, formed Brazoria with the understanding between them that Looney would furnish the original capital, that petitioner would furnish building equipment and services as general manager of construction, that A. W. Greer would furnish bond for the corporation and obtain loans in the amount of $160,000, and that petitioner and his father would indemnify Looney against loss from the venture.

On December 14, 1942, petitioner was duly elected a director, president, and general manager of Brazoria. He continued in that capacity until the corporation was dissolved.

The construction of 191 houses at Lake Jackson, Texas, under a contract with Dow Chemical Company, was the only and entire business venture of Brazoria from the time it was incorporated until the time it dissolved. In order to finance the project, Brazoria borrowed extensive sums of money from American General Investment Corporation and arranged for the financing of the project through the Federal Housing Administration. The loans were made on the strength of a bond in the amount of $160,000 furnished by the corporation, the premiums for which were guaranteed by A. W. Greer. American General Insurance Company was surety on the bond and petitioner and A. W. Greer signed an indemnity agreement to insure American General Insurance Company against loss as surety on such bond.

At the outset, American General Investment Corporation agreed to lend Brazoria sums of money not to exceed $200,000 for the Lake Jackson project. In June of 1943 it agreed to make additional advancements to Brazoria estimated to aggregate $420,000. The bond, by amendment, was made to apply to all sums already advanced and to be advanced by American General Investment Corporation.

Petitioner and A. W. Greer, doing business as equal partners under the assumed partnership name of Greer Building Materials Company, furnished materials to Brazoria for the construction of the 191 houses. The sales to Brazoria constituted about 98 per cent of the partnership business. The selling price of these materials was carried on an open account by the partnership. During the years 1943 and 1944 the partnership sold to the corporation building material in the respective amounts of $49,507.84 and $2,998.70, resulting in a balance in the corporation's open account on the partnership books of $52,506.54 on December 31, 1944.

From and after April 1, 1944, the partnership did not include any mark up in the selling price of the materials furnished to Brazoria. The partnership and each of the partners prepared their income tax returns on the cash basis. The aforementioned sales of materials were not reflected in the income tax returns of the partnership or the partners for the years 1943, 1944, or any other year. The cost of such material was included on the partnership returns as a part of cost of goods sold in 1943 and 1944.

The 191 houses were originally built as rental units, to be occupied by employees of the Dow Chemical Company. All 191 houses were completed by June 1, 1944, at which time there were 80 vacancies, and during the period of construction, only about one-fifth of the completed houses were occupied. The demand for rental houses was not as great as anticipated and Brazoria was unable to rent the houses as they were completed. As a result, Brazoria was under serious financial stress during part of 1943 and 1944. In the latter year Brazoria determined that an attempt should be made to sell the houses, and, through its officers, began in 1944 to make strenuous efforts towards selling the houses through advertising and personal contacts.

At a meeting of the stockholders and directors held on May 30, 1944, it was reported that the books of Brazoria showed it to be insolvent and that there was insufficient income to meet obligations which were then due and past due. In order to remedy this condition, A. W. Greer agreed to lend Brazoria sufficient money, not to exceed $35,000, to meet current demands. This agreement was made on the condition that Looney would sell his stock to A. W. Greer and petitioner and that the same would become treasury stock upon payment therefor by Brazoria. Such payment was to be made prior to payment of the A. W. Greer loan. The foregoing condition was imposed because A. W. Greer had agreed to indemnify Looney against loss and he was not willing to make further advances for the benefit of outside stockholders.

In exchange for Looney's stock, petitioner and A. W. Greer gave their personal note in the amount of $19,000 and a cash payment of $1,000. The stock was transferred, 94 shares to A. W. and Ivan Greer and 10 shares to Vera L. McCartney. The note provided for payment in monthly installments of $1,000 each. Pursuant to a plan adopted at the stockholders and directors meeting of May 30, 1944, the installments were paid by Brazoria and the stock became treasury stock.

The moneys advanced by American General Investment Corporation were for ‘interim financing only. As each house was completed and accepted by the Federal Housing Administration, Providence Institution for Savings would then make an F.H.A. insured loan to Brazoria, secured by a mortgage, in which transaction American General Investment Corporation would be paid such amount as was due it on each house. After such loan, Brazoria became obligated to make monthly payments on each house to Providence Institution for Savings. In the year 1944, Brazoria was unable to meet the monthly payments out of its own funds and income.

Pursuant to a decision reached at the stockholders and directors meeting of May 30, 1944, Brazoria borrowed funds from two sources to meet the payments. A. W. Greer advanced about $32,000, and on September 27, 1944, Brazoria entered into a contract with Dow Chemical Company whereby Dow agreed to make such advances as would be necessary to meet the monthly payments. By its terms the contract with Dow was to run until January 31, 1945. Brazoria agreed to repay those advances out of the purchase price or first rental money upon the sale or renting of each house. On September 27, 1944, Dow Chemical Company and Brazoria executed an instrument agreeing that no conveyance by Brazoria of any lot in area C, all of which had been affected by the contract for advances executed the same day, should be valid unless approved by Dow Chemical Company. On December 30, 1944, the Dow contract for advances was extended to run through July 1, 1945.

The ‘sales‘ of houses were made under an arrangement whereby the purchaser could take possession by giving a small or even no downpayment and signing a contract to pay out the downpayment over a period of 3 years. The purchaser did not execute promissory notes for the downpayment. When the entire amount of a downpayment was paid, Brazoria would give a deed to the purchaser, and the purchaser would give a deed of trust to the loan company. Brazoria's obligation to Providence Mutual to make monthly payments on each house continued until the full amount of the downpayment was paid. As a contract of sale was entered into, the entire amount of the sale price as agreed upon in the contract would be entered on Brazoria's books as a credit to sales. In the 1944 income tax return, Brazoria reported as sales on the capital gains schedule the contracts entered into during the year on 38 houses. The sale price listed thereon was the full price agreed upon in the contract of sale with respect to each house and lot. With respect to none of such sales did it receive the full amount of the purchase price at the time of the sale.

In the year 1944 Brazoria disposed of only 38 houses. On December 31, 1944, 153 of the houses remained in its possession. It was indebted to American General Investment Corporation to the extent of $4,000. It was indebted to Providence Mutual in the principal amount of $541,089.24. The payments on that indebtedness amounted to approximately $3,500 each month. It was indebted to Greer Building Materials Company in the amount of $52,506.54. It still had an obligation of $13,000 on the agreement to purchase Looney's stock. It was indebted to A. W. Greer and Dow Chemical Company for advances made in 1944 to meet the monthly installments of principal and interest on the unoccupied houses.

The cost of the 153 houses and lots which were not disposed of on December 31, 1944, was reflected on Brazoria's books as $609,174.32. This amount included the portion of the materials which went into these houses represented by the unpaid indebtedness owed to Greer Building Materials Company. On its return for the calendar year 1944, Brazoria reported a net loss of $17,133.15, which included a deduction for contributions in the amount of $108.

On January 8, 1945, at a meeting of the stockholders and directors, Greer Building Materials Company forgave the account for materials in the amount of $52,506.54. The account was forgiven in good faith in order to keep Brazoria solvent. The cancellation was not to any extent made for the purpose of evading or avoiding income tax liability. It was intended to be and was a contribution to capital and was intended to be and was treated as paid in surplus.

On the last above date the ownership of the stock was as follows:

+-------------------------+ ¦ ¦Shares¦ +------------------+------¦ ¦A. W. Greer ¦4 3/4 ¦ +------------------+------¦ ¦Ivan H. Greer ¦4 3/4 ¦ +------------------+------¦ ¦Vera L. McCartney ¦1/2 ¦ +------------------+------¦ ¦Treasury stock ¦70 ¦ +-------------------------+

Held by Ivan Greer, Vera L. McCartney and A. W. Greer, to become Treasury stock 120 200

On the above date, 70 of the 198 shares which had been purchased from Looney had been transferred to the corporation as treasury stock. Ivan H. Greer and Alfred W. Greer, who already held 1 share of stock each, had paid $500 each into the corporation for 8 shares of the stock which they held and which had formerly belonged to Looney. These 8 shares had been issued, 3 3/4 shares to Alfred W. Greer, 3 3/4 shares to Ivan H. Greer, and 1/2 share to Vera L. McCartney.

Petitioners did not report a loss of $52,506.54 on their individual returns for the year 1945, nor for any greater or lesser amount representing loss arising from the cancellation of the debt. Nor did they include the amount in income in their returns for the years 1943, 1944, or any other year.

By December 31, 1945, the remaining 120 shares which had been purchased from Looney were transferred to the corporation as treasury stock. On June 1, 1946, Ivan H. Greer assigned 1 share to Phyllis G. McMahan. On October 17, 1946, Alfred W. Greer sold his shares to the corporation as treasury stock. After these transfers, and on December 20, 1946, the stock ownership was as follows:

+-----------------------------------+ ¦ ¦Shares ¦ ¦ +------------------+--------+-------¦ ¦Ivan H. Greer ¦ ¦3 3/4 ¦ +------------------+--------+-------¦ ¦Vera L. McCartney ¦ ¦1/2 ¦ +------------------+--------+-------¦ ¦Phyllis G. McMahan¦ ¦1 ¦ +------------------+--------+-------¦ ¦Treasury stock ¦ ¦194 3/4¦ +-----------------------------------+

On December 20, 1946, Brazoria was dissolved, by which date the debts owing to Dow Chemical Company and to A. W. Greer had been paid in full and Brazoria had ‘sold‘ all but 40 of its houses. The downpayments on these 40 houses had not been fully paid pursuant to the contracts of sale covering them, and deeds therefor had not been executed. Of these 40 contracts so outstanding, 13 had been reported as sales on Brazoria's corporation income tax return for the calendar year 1944, and 11 had been so reported for the calendar year 1945.

On December 18, 1946, Brazoria conveyed all its assets, which included the foregoing 40 houses under contracts of sale, to petitioner.

In keeping its corporate books, Brazoria kept a separate cost account for each house. In its 1944 return, the cost of each house was taken from the cost as reflected by the books of the corporation, which included the portion of the materials which went into these 38 houses represented by the unpaid indebtedness owed to Greer Building Materials Company. The 1945 corporate return treated the contracts of sale in the same manner by reporting thereon as capital gains the profit on contracts of sale entered into during that year on 28 houses and lots. The cost of the building materials purchased by Brazoria from the partnership was recorded on Brazoria's books as a part of the cost of the houses. This included the balance of the account, $52,506.54, which was never paid by Brazoria and was eventually forgiven. In computing depreciation and cost of sales, Brazoria included as part of the cost bases of the houses, the entire amount of its purchases from the partnership, including the amount which was never paid.

By charger amendment, the number of authorized shares which Brazoria could issue was reduced to 200, on December 1, 1944.

When Brazoria was dissolved in 1946, it filed a Form 1099-L information return showing the value of petitioner's liquidation dividend as $36,600.04. This return was prepared from an accountant's work sheet containing a trial balance taken from the corporate ledger as of December 19, 1946, certain accountant's adjustments, and a distribution of the resulting adjusted trial balance to the balance sheet accounts, profit and loss accounts, and two liquidation accounts.

The liquidation dividend so reported was computed as follows:

+--------------------------------------------------+ ¦Freeport National Bank Account ¦$11,636.11 ¦ +--------------------------------------+-----------¦ ¦First National Bank of Houston Account¦40,000.00 ¦ +--------------------------------------+-----------¦ ¦Ivan Greer Liquidating Account ¦500.00 ¦ +--------------------------------------+-----------¦ ¦Cash ¦364.36 ¦ +--------------------------------------+-----------¦ ¦Equity in contracts of sales ¦15,078.18 ¦ +--------------------------------------+-----------¦ ¦Office furniture and fixtures ¦306.79 ¦ +--------------------------------------+-----------¦ ¦Completed houses ¦138,002.37 ¦ +--------------------------------------+-----------¦ ¦Total ¦$205,887.81¦ +--------------------------------------------------+

The following obligations of the corporation, subject to which these properties were taken, were deducted from the above:

+----------------------------------------------------------------+ ¦Accrued withholding and social security taxes ¦$182.79 ¦ +----------------------------------------------------+-----------¦ ¦Reserve for F. H. A. payable ¦1,056.21 ¦ +----------------------------------------------------+-----------¦ ¦Principal indebtedness on the properties transferred¦165,611.76 ¦ +----------------------------------------------------+-----------¦ ¦Accrued Federal income tax ¦2,437.01 ¦ +----------------------------------------------------+-----------¦ ¦Total ¦$169,287.77¦ +----------------------------------------------------------------+

The resulting net distribution based upon the above figures was $36,600.04. The amount of $36,600.04, reported by Brazoria on the Form 1099-L information return, was reported in equal amounts by Ivan H. and Lita Greer on their separate returns for 1946 on the community property basis. In computing the gain realized from this liquidating dividend petitioners reported the full amount as gain and did not deduct anything from the amount received in liquidation as representing the cost or other basis of holding. The liquidation dividend was computed by respondent as follows:

+--------------------------------------------------+ ¦Cash ¦$52,500.47¦ +---------------------------------------+----------¦ ¦Furniture and equipment ¦306.79 ¦ +---------------------------------------+----------¦ ¦Equity in houses under contract of sale¦15,078.18 ¦ +---------------------------------------+----------¦ ¦Accounts payable ¦(1,239.00)¦ +---------------------------------------+----------¦ ¦Accrued income taxes ¦(2,437.01)¦ +---------------------------------------+----------¦ ¦Total ¦$64,209.43¦ +--------------------------------------------------+

Vera L. McCartney was secretary-treasurer of Brazoria. Its books of account were set up by her and were kept either by her or under her supervision. She filled out Brazoria's income tax returns for 1944, for 1945, and assisted in filling out the return for 1946. For each of the years 1944 to 1946, the income tax return filed by Brazoria contained a question directed to the taxpayer asking whether the return was being made on the basis of cash receipts and disbursements. In each instance the question was answered ‘yes.‘ Such affirmative answers were made by Vera L. McCartney, who, at that time, did not understand the meaning of the question.

OPINION.

VAN FOSSAN, Judge:

Respondent, on brief, has receded from the position taken by him in Docket No. 35604 and in the affirmative allegations in Docket No. 23611 that Brazoria realized income in 1945 upon the cancellation of the indebtedness owing to the Greer Building Materials Company. The petitioner and his wife concede community liability as transferees for any taxes due from Brazoria. The issues remaining relate only to the adjusted bases of certain houses for purposes of determining gain or loss and depreciation, and the amount of gain realized upon a liquidating dividend. The facts relative to the first issue, very briefly summarized, are as follows:

Brazoria, organized by the petitioner, his father, and R. D. Looney, built 191 houses. Interim financing had been obtained from American General Investment Corporation and as the houses were completed and approved by the Federal Housing Administration, an insured loan, secured by mortgage from Brazoria, was obtained from Providence Institution for Savings. The interim financier was then paid. The petitioner and his father, as equal partners, did business as the Greer Building Materials Company, which furnished materials to Brazoria for the 191 houses. The partnership carried the price of this material on an open account with Brazoria and during 1943 and 1944 materials in the amounts of $49,507.84 and $2,998.70 were sold. The sales price of these materials was carried on Brazoria's open account. The Greer Building Materials Company and the partners, reporting their income on the cash basis, did not include the selling price of this material in their income tax returns for these years. The cost of this material, however, was included in the partnership returns as part of cost of goods sold in 1943 and 1944. In January 1945, the partnership forgave the indebtedness owing to it from Brazoria in the total amount of $52,506.54. At that time Brazoria's outstanding stock was held principally by the petitioner and his father, each owning 4 3/4 shares. Vera L. McCartney held one-half share and the remainder was either treasury stock or held bo become such. The cancellation of the indebtedness was intended to be and was a contribution to capital and was treated by Brazoria as paid in surplus. The cost of the houses, as reflected on Brazoria's books, included the materials which had been supplied by the partnership and payment for which was forgiven.

The initial question presented is the determination of Brazoria's basis in the houses constructed by it. The respondent contends that the unadjusted basis of the 191 houses must be reduced in the amount of $52,506.54 because of the gratuitous cancellation of an unpaid account by creditors who were Brazoria's principal stockholders at the time. We deem it unnecessary to determine the question which was raised by the respondent of the correctness of Brazoria's method of accounting because the materials supplied gratuitously by the partnership should not be reflected in Brazoria's basis in the houses, regardless of the method of accounting.

The cancellation of indebtedness is conceded to be gratuitous and no question of income to Brazoria therefrom is presented. See Commissioner v. Jacobson, 336 U.S. 28; Helvering v. American Dental Co., 318 U.S. 322; United States v. Kirby Lumber Co., 284 U.S. 1. Where a stockholder gratuitously forgives a corporation's debt to himself, the transaction is considered to be a contribution to capital. Helvering v. American Dental Co., supra; Regs. 111, sec. 29.22(a)-13. Although the partnership itself was the creditor to which the debt was owing, it could only act through the partners who were also stockholders in Brazoria. Moreover, a contribution to capital may be made by a non-stockholder. Brown Shoe Co., Inc. v. Commissioner, 339 U.S. 583. The Supreme Court in the latter case held that where money and property were transferred by communities to a corporation for the purpose of constructing or enlarging factories in these communities, the values received were additions to capital and constituted contributions to capital within the meaning of section 113(a)(8)(B) of the Internal Revenue Code. The corporation there in question used the money contributed to pay general operating expenses and to purchase assets, including factory buildings and equipment. The Court held that no reduction in the depreciation basis of the properties acquired was required and that the taxpayer was entitled to deductions on account of depreciation under section 113(a)(8)(B), Internal Revenue Code upon all the property acquired after December 31, 1920. Thus, the contributed money was related to the properties purchased with that money for purposes of determining depreciation basis. We believe that the rationale of the Brown Shoe Co. decision requires relation of Brazoria's forgiven debt to the property for which the debt was incurred in the determination of the basis of the property under section 113(a)(8)(B), Internal Revenue Code. In the Brown Shoe Co. case money was contributed and property purchased therewith. In the present instance property was originally sold and the debt for the sale price forgiven. In the Brown Shoe Co. case the assets acquired by the taxpayer were held to be additions to capital requiring no reduction in basis for depreciation purposes. The relation of money paid into a corporation and assets acquired therewith was also approved in Detroit Edison Co. v. Commissioner, 319 U.S. 98.

SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) BASIS (UNADJUSTED) OF PROPERTY.— The basis of property shall be the cost of such property; except that—(8) PROPERTY ACQUIRED BY ISSUANCE OF STOCK OR AS PAID-IN SURPLUS.— If the property was acquired after December 31, 1920, by a corporation—(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

In the present instance, however, the materials in question had a zero basis when the contribution was made and section 113(a)(8) requires a substitution of basis. The partnership which forgave the debt for the materials had recovered all its cost in the materials by including this cost in cost of goods sold in 1943 and 1944 but had not reported the unpaid sales price as income. The entire cost of the materials contributed to the corporation having been recovered by the partners, who were also the principal stockholders of the receiving corporation, the property received had a zero basis when the debt was forgiven in 1945. The conclusion reached is that Brazoria, taking the substituted basis of the partnership, cannot include the $52,506.54 in its basis in the houses constructed by it.

Turning to the second issue presented, the pertinent facts are that on October 17, 1946, Alfred W. Greer sold his shares in the corporation to Brazoria as treasury stock. Following this transaction and at the date of dissolution, 3 3/4 shares were held by the petitioner, 1 share having been sold in June 1946 to Phyllis G. McMahan, who still held this share at dissolution, and 1/2 share was held by Vera L. McCartney. The remainder was treasury stock. On December 18, 1946, Brazoria conveyed all its assets, including 40 houses under contracts for sale, the down payments for which had not been fully paid, to the petitioner. On December 20, 1946, Brazoria was dissolved. An information return was filed by Brazoria showing the value of petitioner's liquidating dividend as $36,600.04.

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(c) DISTRIBUTION 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. * * *SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.(a) COMPUTATION OF GAIN OR LOSS.— The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113(b) for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

Of the total assets, the parties agree that money in bank accounts and cash totaling $52,507.47, $306.79 in equipment, and $15,078.18 in equity in sales contracts were properly included. It is also agreed that liabilities in the amount of $1,239 were assumed by the petitioner and tax liability in the amount of $2,437.01 was also assumed. The inclusion, urged by petitioner, of $138,002.37 as the depreciated cost of the houses in assets received and $165,611.76 as the sales price of the properties in obligations assumed cannot be approved. The petitioner could only receive from the houses under contract for sale the remaining part of the downpayment. When that payment was received a deed would be given to the purchaser who would then give a deed of trust to the loan company and a substitution of mortgagors would take place. The value of Brazoria's equity in these contracts has already been included in the assets received by the petitioner, and no further adjustments need be made.

The petitioner contends further that the amount of the debt forgiven by the partnership, Greer Building Materials Company, must be included in the basis of petitioner's stock in Brazoria for purposes of determining the liquidating dividend. Although a contribution to capital by a stockholder will increase the cost basis of his shares of stock in the corporation, Kasle v. United States, 75 F.Supp. 340; Weeks v. White, 9 F.Supp. 79, affd. 77 F.2d 817, see also Regs., 111, sec. 29.22(a)-16, we are of the opinion that the petitioner cannot here avail himself of this rule. The partnership which made the contribution to capital recovered the cost of this material by including it in cost of goods sold during 1943 and 1944. The partners who received the tax advantage of this inclusion upon their own income tax returns were the principal stockholders at the time of the forgiveness of the debt in the corporation receiving the contribution. An increase in their basis in the stock held by them would grant them a further tax advantage as stockholders upon the disposition of property, the cost of which had already been recovered for tax purposes by the same persons as partners. The partners had not included the sales price of the material in income for which they took a reduction of gross income in cost of goods sold. A further reduction upon return of the property at the time of the corporate liquidation by increasing their basis in the stock held by them could only be accomplished by appropriating a cost basis to property upon which the owners had recovered all cost. The actual cost of the petitioner's stock is the $500 paid for it and that must be taken as his basis in determination of his liquidating dividend.

Reviewed by the Court.

Decisions will be entered under Rule 50.

ARUNDELL, J., dissents.