Commissioner v. Boca Ceiga Development Co.

¶4DAVIS, Circuit Judge.

¶5This petition involves income taxes for the fiscal year ending February 28,19?,6.

¶6*1005On October 30, 1925-, the respondent, the Boca Ceiga Development Company, a Florida real estate corporation, sold a tract of land to one of its stockholders for a gross consideration of $504,000, and received from the purchaser 480 shares of its capital stock, valued at $48,000, as the initial payment. For income tax purposes, the Commissioner of Internal Revenue computed the realized profit upon the installment sale basis as follows:

¶7"Sale Price:

¶8Mortgage ..............................$384,000.00

¶9Mortgage assumed by vendee........... 42,000.00

¶10Stock of taxpayer corporation at par value also fair market value...... 48,000.00

¶11Notes receivable ($30,000.00, no market value)

¶12Total sales price exclusive of notes.... 474,000.00

¶13Cost ...................................... 109,448.29

¶14Profit .................................... 274,551.71

¶15Sales price............................... 474,000.00

¶16Less:

¶17Mortgage assumed by vendee....... 42,000.00

¶18Amount to be paid by vendee.......... $432,000.00

¶19Percentage of profit, $274,551.71~$432,-000=.63553 Initial payment............................ $ 48,000.00

¶20Profit realized.............................$ 30,505.44”

¶21The question involved in this ease is whether or not the respondent realized any iaxable gain on the initial payment made to it with its own stock.

¶22The Commissioner determined that the proportion, of the initial payment, which represented profit, was taxable regardless of the fact that the respondent’s stock was the medium by which the payment was made. The Board of Tax Appeals was of the opinion that the respondent realized no gain from the transaction during the taxable year since it had received therein shares of its stock only. The Commissioner brought this petition to review the Board’s order of redeterminaüon.

¶23The Board’s decision that a corporation realizes neither a gain nor loss from the purchase of its stock was in keeping with its position at the time when it determined this case (Houston Brothers Company, 21 B. T. A. 804; S. A. Woods Machine Company, 21 B. T. A. 818; Schiller Piano Company, 23 B. T. A, 376), although its earlier decisions were to the contrary. Behlow Estate Company, 12 B. T. A. 1365; New Jersey Porcelain Company, 15 B. T. A. 1059. Meanwhile, the courts have held that a eorp oration acquiring its own stock may recognize a gain or loss provided the purpose of the transaction was not merely a capital readjustment [Johnson v. Commissioner (C. C. A.) 56 F.(2d) 58, certiorari denied 286 U. S. 551, 52 S. Ct. 502, 76 L. Ed. 1287], but a sale of properly. Walville Lumber Company v. Commissioner, 35 F.(2d) 445 (C. C. A. 1); Spear & Co. v. Heiner, 54 F.(2d) 134 (D. C. W. D. Pa.); Commissioner v. S. A. Woods Machine Company, 57 F.(2d) 635, 636 (C. C. A. 3). Since these decisions, the Board has adopted the rule laid down by the courts. Houghton and Dutton Company, 26 B. T. A. 52.

¶24The question here is disposed of by the following quotation from the Woods Case, supra: “The transaction involved in this case was equivalent to the payment of the debt in cash and the investment of the proceeds by the corporation in its own stock. If that had been done clearly the cash received would have been taxable income. The transaction was not changed in its essential character by the fact that, as the debtor happened also to own the stock, the money payment and the purchase of stock were by-passed, and the stock was directly transferred in payment of the debt. The stock was the medium in which the debt was paid. The wide door to evasion of taxes opened by the decision of the Board is an additional reason, and a weighty one, against it.”

¶25The determination of the Commissioner is approved, and the order of the Board of Tax Appeals reversed.