[464]*464OPINION.
Smith:
The sole question involved in this proceeding is whether the petitioner realized taxable gain under the provisions of section 202(b) of the Revenue Act of 1918 in connection with certain transactions which took place on December 5, 1919. Section 202 of the Revenue Act of 1918 provides a basis for determining gain or loss in connection with certain transactions and reads in part as follows:
(b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *
Petitioner contends that he derived no taxable gain from the transactions outlined in the findings of fact; that the events which took [465]*465place on December 5, 1919, were separate and distinct transactions and that when the petitioner transferred to the Flint-Adaskin Furniture Co. certain assets for shares of stock of that company the Flint-Adaskin Furniture Co. had no assets whatever and that, therefore, the shares of stock received must be considered as having the same value as the assets turned in to the corporation for such shares of stock; that, even if the proof as to the separateness of the transactions was insufficient, nevertheless there is no proof that the fair market value of the shares of stock received by Adaskin on December 5, 1919, in exchange for the assets turned in for such shares of stock had a fair market value in excess of $105,000. The respondent on the other hand contends that at the time Adaskin transferred the assets to the Flint-Adaskin Furniture Co. for shares of stock there was an enforceable understanding between the parties concerned that the Flint-Adaskin Furniture Co. was to acquire the assets of Flint & Co., Inc., and was to issue in payment therefor only shares of its common stock and that the substance of the transaction is that the fair market value of the assets to be acquired by the Flint-Adaskin Furniture Co. was equal to the book value of the assets of the two concerns acquired, and that upon any reasonable basis of apportionment as between preferred stock and common stock the petitioner received shares of stock which had a market value in excess of $105,000.
The evidence plainly shows the successive steps to this transaction. The negotiations between Adaskin and the stockholders of Flint & Co., Inc., which took place prior to 6 p. m., December 5, 1919, in no wise operated to bind the Flint-Adaskin Furniture Co. The first meeting of the stockholders of the Flint-Adaskin Furniture Co. was at 6.30 p. m., on December 5, 1919.
Although the deponents all testified that , there had been preliminary discussion and negotiations between all parties concerned with reference to Adaskin’s known purpose in initiating the proceedings in question, namely to consolidate the Anthony Furniture Co. with Flint & Co., Inc., and to refinance them, and that to this end the Flint-Adaskin Furniture Co. had been incorporated and the meeting of the principal parties interested had been arranged for the evening of December 5, 1919, yet it is the uncontradicted testimony of all deponents that there was no actual agreement reached and no final action taken until after thorough discussion on the evening of December 5,1919, and that not until after Adaskin had consummated his purchase of the Anthony Furniture Co.’s assets and transferred them to the Flint-Adaskin Furniture Co. was the stockholders’ meeting of Flint & Co., Inc., held and the offer of the Flint-Adaskin Furniture Co. accepted. The transactions took place in Rhode [466]*466Island, and involved the transfer of the assets of two Rhode Island corporations to a third Rhode Island corporation, and are necessarily governed by and are to be interpreted in accordance with the law and decisions of the court of Rhode Island. On the point thus raised the Supreme Court of that State has twice had occasion to decide that an agreement purported to be made in behalf of a corporation before its organization is not binding upon nor enforceable by such corporation, at least until it has been adopted. In Ireland v. Globe Milling & Reduction Co. (1897) 20 R. I., 190; 38 Atl. 116, it definitely appeared that certain of the incorporators and proposed stockholders of a corporation to be organized agreed that no stockholder should sell his stock to any person without first giving the corporation an opportunity to purchase the same. The corporation was subsequently organized and stock subscribed for and issued. Some time later the plaintiff, a stockholder, sold some of his stock without first offering it for sale to the corporation itself. The corporation, basing its action on the above agreement between its incorpo-rators, refused to transfer the stock upon its books and the plaintiff brough suit for damages for such refusal. The court held that admitting the agreement above described to have existed, it constituted no defense to the action in question since the corporation was not bound by and could not enforce the provisions of such contract.
In Anderson v. Johnson (1923) 45 R. I. 17; 119 Atl. 642, the Supreme Court of Rhode Island affirmed the decision in the Globe Milling Co. case and held that stock issued pursuant to an agreement between the promoters before the organization of the corporation, the issue of which was otherwise entirely unauthorized by vote of the stockholders or directora, was invalid, the court stating, citing the Globe Milling Co. case:
As the corporation was not in existence when the contract was made it was incapable of making the contract and the promoters had no authority to bind the corporation by any contract made by or between them.
That this is the law in substantially all jurisdictions is shown by the following:—
14 O. J. Corporation, Sec. 289, p. 255 and cases cited; Fletcher Cyc. Corporations, Sec. 150, p. 306 and cases cited.
In the case of Plaquemines, etc. Co. v. Buck, 52 N. J. Eq. 219, 27 Atl. 1094 (1893) the court said:
“No rights, legal or equitable, arise in favor of a corporation in respect to transactions, whether complete or inchoate, merely because entered into in contemplation of the creation of such corporation.”
See also Winters v. Hub Mining Co. (1893) 57 Fed. 287; Penn Match Co. v. Hapgood (1886) 141 Mass. 145; 7 N. E. 22.
It would follow in the case at bar that even if there had been an agreement between either Flint & Co., Inc., or its stockholders [467]*467with Adaskin, made prior to the evening of December 5, 1919, such contract could not be imputed to the Flint-Adaskin Furniture Co. when made before its organization and so could not upon such organization be enforced by it.
Turning to the principal contention on behalf of the petitioner that the transactions in question, having taken the form of a series of distinct legal steps, must be so treated in connection with the determination of taxable gain or loss resulting therefrom, it appears that this position is fully supported by decisions of this Board. Appeals of Edward A. Langenbach, 2 B. T. A. 777; West Point Investment Co., 1 B. T. A. 436; Herbert E. Clayburgh, 1 B. T. A. 573; H. F. Kerr, 5 B. T. A. 1073.
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[464]*464OPINION.
Smith:
The sole question involved in this proceeding is whether the petitioner realized taxable gain under the provisions of section 202(b) of the Revenue Act of 1918 in connection with certain transactions which took place on December 5, 1919. Section 202 of the Revenue Act of 1918 provides a basis for determining gain or loss in connection with certain transactions and reads in part as follows:
(b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *
Petitioner contends that he derived no taxable gain from the transactions outlined in the findings of fact; that the events which took [465]*465place on December 5, 1919, were separate and distinct transactions and that when the petitioner transferred to the Flint-Adaskin Furniture Co. certain assets for shares of stock of that company the Flint-Adaskin Furniture Co. had no assets whatever and that, therefore, the shares of stock received must be considered as having the same value as the assets turned in to the corporation for such shares of stock; that, even if the proof as to the separateness of the transactions was insufficient, nevertheless there is no proof that the fair market value of the shares of stock received by Adaskin on December 5, 1919, in exchange for the assets turned in for such shares of stock had a fair market value in excess of $105,000. The respondent on the other hand contends that at the time Adaskin transferred the assets to the Flint-Adaskin Furniture Co. for shares of stock there was an enforceable understanding between the parties concerned that the Flint-Adaskin Furniture Co. was to acquire the assets of Flint & Co., Inc., and was to issue in payment therefor only shares of its common stock and that the substance of the transaction is that the fair market value of the assets to be acquired by the Flint-Adaskin Furniture Co. was equal to the book value of the assets of the two concerns acquired, and that upon any reasonable basis of apportionment as between preferred stock and common stock the petitioner received shares of stock which had a market value in excess of $105,000.
The evidence plainly shows the successive steps to this transaction. The negotiations between Adaskin and the stockholders of Flint & Co., Inc., which took place prior to 6 p. m., December 5, 1919, in no wise operated to bind the Flint-Adaskin Furniture Co. The first meeting of the stockholders of the Flint-Adaskin Furniture Co. was at 6.30 p. m., on December 5, 1919.
Although the deponents all testified that , there had been preliminary discussion and negotiations between all parties concerned with reference to Adaskin’s known purpose in initiating the proceedings in question, namely to consolidate the Anthony Furniture Co. with Flint & Co., Inc., and to refinance them, and that to this end the Flint-Adaskin Furniture Co. had been incorporated and the meeting of the principal parties interested had been arranged for the evening of December 5, 1919, yet it is the uncontradicted testimony of all deponents that there was no actual agreement reached and no final action taken until after thorough discussion on the evening of December 5,1919, and that not until after Adaskin had consummated his purchase of the Anthony Furniture Co.’s assets and transferred them to the Flint-Adaskin Furniture Co. was the stockholders’ meeting of Flint & Co., Inc., held and the offer of the Flint-Adaskin Furniture Co. accepted. The transactions took place in Rhode [466]*466Island, and involved the transfer of the assets of two Rhode Island corporations to a third Rhode Island corporation, and are necessarily governed by and are to be interpreted in accordance with the law and decisions of the court of Rhode Island. On the point thus raised the Supreme Court of that State has twice had occasion to decide that an agreement purported to be made in behalf of a corporation before its organization is not binding upon nor enforceable by such corporation, at least until it has been adopted. In Ireland v. Globe Milling & Reduction Co. (1897) 20 R. I., 190; 38 Atl. 116, it definitely appeared that certain of the incorporators and proposed stockholders of a corporation to be organized agreed that no stockholder should sell his stock to any person without first giving the corporation an opportunity to purchase the same. The corporation was subsequently organized and stock subscribed for and issued. Some time later the plaintiff, a stockholder, sold some of his stock without first offering it for sale to the corporation itself. The corporation, basing its action on the above agreement between its incorpo-rators, refused to transfer the stock upon its books and the plaintiff brough suit for damages for such refusal. The court held that admitting the agreement above described to have existed, it constituted no defense to the action in question since the corporation was not bound by and could not enforce the provisions of such contract.
In Anderson v. Johnson (1923) 45 R. I. 17; 119 Atl. 642, the Supreme Court of Rhode Island affirmed the decision in the Globe Milling Co. case and held that stock issued pursuant to an agreement between the promoters before the organization of the corporation, the issue of which was otherwise entirely unauthorized by vote of the stockholders or directora, was invalid, the court stating, citing the Globe Milling Co. case:
As the corporation was not in existence when the contract was made it was incapable of making the contract and the promoters had no authority to bind the corporation by any contract made by or between them.
That this is the law in substantially all jurisdictions is shown by the following:—
14 O. J. Corporation, Sec. 289, p. 255 and cases cited; Fletcher Cyc. Corporations, Sec. 150, p. 306 and cases cited.
In the case of Plaquemines, etc. Co. v. Buck, 52 N. J. Eq. 219, 27 Atl. 1094 (1893) the court said:
“No rights, legal or equitable, arise in favor of a corporation in respect to transactions, whether complete or inchoate, merely because entered into in contemplation of the creation of such corporation.”
See also Winters v. Hub Mining Co. (1893) 57 Fed. 287; Penn Match Co. v. Hapgood (1886) 141 Mass. 145; 7 N. E. 22.
It would follow in the case at bar that even if there had been an agreement between either Flint & Co., Inc., or its stockholders [467]*467with Adaskin, made prior to the evening of December 5, 1919, such contract could not be imputed to the Flint-Adaskin Furniture Co. when made before its organization and so could not upon such organization be enforced by it.
Turning to the principal contention on behalf of the petitioner that the transactions in question, having taken the form of a series of distinct legal steps, must be so treated in connection with the determination of taxable gain or loss resulting therefrom, it appears that this position is fully supported by decisions of this Board. Appeals of Edward A. Langenbach, 2 B. T. A. 777; West Point Investment Co., 1 B. T. A. 436; Herbert E. Clayburgh, 1 B. T. A. 573; H. F. Kerr, 5 B. T. A. 1073. Clearly, under the statute petitioner derived no gain from the sale of his assets to Flint-Adaskin Furniture Co. for shares of stock of that company unless the fair market value of the shares of stock received was in excess of the cost of the assets transferred, namely, $105,000. It is the contention of the respondent that the assets turned in by Adaskin were to be appraised and that the assets acquired from Flint & Co., Inc., were to be likewise appraised; that for any excess in the appraisal of the assets turned in by Adaskin over those acquired from Flint & Co., Inc., same was to be paid for by the issuance to Adaskin of additional shares of preferred stock. This we think proves no fair market value of the shares of stock received by Adaskin in excess of the $105,000 paid by him for the assets of the Anthony Furniture Co. Even if this were so, the appreciation in the value of Adaskin’s shares is not taxable as income. The increment in value, if any, occurred after Adaskin had acquired his shares of stock, the valúe of which is here involved. Deponents, who were in position to know of the value of the preferred and common stock, testified that the value of the stock on December 5, 1919, was at most problematical. The earnings of the predecessor companies afford no basis for a contention that the value of the stock received by Adaskin was in excess of $105,000. It was, of course, believed by Adaskin and the others interested, that the Flint-Adaskin Furniture Co. could be operated at a profit. But only the future could tell.
From a consideration of the entire evidence we are of the opinion that the fair market value of the shares of stock received by Adaskin for the assets paid in was not in excess of $105,000 and that the petitioner derived no taxable income from the transaction.
Beviewed by the Board.
Judgment will be entered on 15 daps' notice. imder Rule 50.