[1146]*1146OriNION.
MoRRis:
This appeal presents for our consideration the question a to the amount of the gain, if anjq realized by this taxpayer upoi the liquidation of the Hamburg Broom Works, through which th taxpayer received the entire assets of that company in exchange fo: the capital stock owned by him and upon his assuming the outstand ing obligations of the company. The provisions of section 202 (b' of the Revenue Act of 1918 are applicable to the transaction, and thij involves a determination of the fair market value, if any, of th property received by the taxpayer in exchange for his stock, fo: only to the extent that such fair market value exceeds the cost of th stock to the taxpayer can the latter be said to have realized a taxabl gain upon the exchange.
As pointed out in our findings of fact, the Commissioner, basing his determination upon a corrected balance sheet of the Hamburg Broom Works as of the date of liquidation, has determined that th taxpayer received in exchange for stock, which he had acquired at ¡ cost of $132,421, the assets of the dissolved corporation having a ne fair market value of $210,277.47, and that thereby the taxpaye realized a taxable gain of $77,856.47.
On the other hand, the taxpayer contends (1) that the propertie received in liquidation had no fair market value, within the meaninj of section 202 (b) of the Revenue Act of 1918; (2) that, if th properties so received can be said to have had a fair market value, a the date received by the taxpayer, then book values are not a criterio: thereof; (3) that the fair market value, if any, of the propertie received in liquidation was not in excess of $157,500; and (4) that is any event the fair market value of the properties received in liquida tion, as established by the Commissioner, should be reduced by th amount included therein as the value of the good will, also by th amount necessary to reduce the real property value included thereis to an amount which would be more commensurate with the prope value, also by the total amount of certain liabilities of the Hamburj [1147]*1147Broom Works not reflected in the balance sheet of September 30, 1918, nor on the books, which were assumed and paid by the taxpayer.
With the first contention of the taxpayer we feel constrained to disagree. While it may be true to a large extent, and the evidence convinces us that such is the fact, that at September 30,1918, and for an extended period of time thereafter, there was no market in which a corn-broom manufacturing business might be disposed of as a going-concern, nevertheless this is not conclusive proof that the individual assets comprising the plant equipment, real property, stock in trade, raw materials, and accounts receivable had no fair market value. In fact, the preponderance of evidence of record indicates that the plant equipment, real property, stock in trade, and raw materials had a fair market value at the date of distribution, though, in the case of the real property, less than that at which it was carried on the books of the liquidating company. And, with respect to the accounts receivable, it could hardly be said that this asset was without a fair value. At least there is no evidence before us to justify such a conclusion.
With respect to the second contention of the taxpayer, considerable merit is lodged therein, but the principle must necessarily be limited in its application to those instances wherein the proof is ample to demonstrate that book values do not reflect fair market values at the basic date. In the present case the evidence is such as to convince us that the fair market value of the land and buildings received by the taxpayer in liquidation was considerably less than the value at which those assets were carried on the books of the Hamburg Broom Works, 'a fact which' will be given more detailed consideration later on in this opinion. On the other hand, the evidence presented as to the fair market value of the other assets received in liquidation is insufficient to convince us that such value was less than the combined book values of those assets.
The taxpayer’s third contention, that the fair market value, if any, of the properties received in liquidation was not in excess of $157,-500, is based upon the proposition that the amount paid by the taxpayer to Oberholtzer and Hess, to wit, $10,500 for 100 shares of the capital stock of the Hamburg Broom Works, just prior to the liquidation of that company, fixes a value for all the stock of that company and by the same token evidences the maximum fair market value of the assets of that company at the date of distribution.
The stock transaction referred to above involved the purchase and sale of but 100 shares, or one-fifteenth of the entire outstanding capital stock of the Hamburg Broom Works. Ordinarily, we would regard the evidence of such transactions as of little consequence when standing alone. However, when we consider the circumstances [1148]*1148surrounding the transactions, through which the taxpayer acquired these shares of stock, in conjunction with other record evidence pertaining to the value of the assets at the date of distribution, we feel convinced that the transactions have considerable weight in establishing the fair market values of the assets received by the taxpayer in liquidation.
As pointed out in our findings of fact, both Oberholtzer and Hess had been employed by the Hamburg Broom Works throughout the period of its coi'porate existence. Oberholtzer, in his capacity as secretary and treasurer, had an intimate knowledge of the financial condition of the company, as reflected by its books of account, while Hess, through his long association with the company in the capacity of factory superintendent and director, was in a position to know full well the results of the operations of the business. By virtue of these circumstances, both of these individuals knew the value of their stockholdings in the Hamburg Broom Works. Neither was under any obligation whatever to the taxpayer. Both knew, when they parted with their stock, of the taxpayer’s intention to dissolve and liquidate the corporation. If either or both had felt that the purchase price Avas not reasonably equiAralent to the full fair value of their stock, they could have elected to await the liquidation of the company, a matter of 30 days hence, to receive their distributive share in the assets of the company. The transactions were conducted at arm’s length. When we are confronted with circumstances such as these, we are inclined to ascribe to such transactions considerable weight as evidence of the value of the assets, where the value so indicated is supported by other corroborative evidence.
The fourth- contention of the taxpayer is severable into four parts, all of which suggest reasons for a revision downward of the Commissioner’s determination of the fair market value of the assets received by the taxpayer in liquidation. The Commissioner determined said value to be $210,277.47, which represents the net book value of the assets, as shown by the balance sheet set out in our findings of fact, plus good will in the amount of $45,452.56, less income and profits taxes of the company for the nine-month period ended September 30, 1918, in the amount of $47,778.42, which were assumed and paid by the. taxpayer. The contention takes up first the propriety of the Commissioner’s action, in increasing the book value of the assets, for the purpose of the determination, by an alleged good will value of $45,452.56.
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[1146]*1146OriNION.
MoRRis:
This appeal presents for our consideration the question a to the amount of the gain, if anjq realized by this taxpayer upoi the liquidation of the Hamburg Broom Works, through which th taxpayer received the entire assets of that company in exchange fo: the capital stock owned by him and upon his assuming the outstand ing obligations of the company. The provisions of section 202 (b' of the Revenue Act of 1918 are applicable to the transaction, and thij involves a determination of the fair market value, if any, of th property received by the taxpayer in exchange for his stock, fo: only to the extent that such fair market value exceeds the cost of th stock to the taxpayer can the latter be said to have realized a taxabl gain upon the exchange.
As pointed out in our findings of fact, the Commissioner, basing his determination upon a corrected balance sheet of the Hamburg Broom Works as of the date of liquidation, has determined that th taxpayer received in exchange for stock, which he had acquired at ¡ cost of $132,421, the assets of the dissolved corporation having a ne fair market value of $210,277.47, and that thereby the taxpaye realized a taxable gain of $77,856.47.
On the other hand, the taxpayer contends (1) that the propertie received in liquidation had no fair market value, within the meaninj of section 202 (b) of the Revenue Act of 1918; (2) that, if th properties so received can be said to have had a fair market value, a the date received by the taxpayer, then book values are not a criterio: thereof; (3) that the fair market value, if any, of the propertie received in liquidation was not in excess of $157,500; and (4) that is any event the fair market value of the properties received in liquida tion, as established by the Commissioner, should be reduced by th amount included therein as the value of the good will, also by th amount necessary to reduce the real property value included thereis to an amount which would be more commensurate with the prope value, also by the total amount of certain liabilities of the Hamburj [1147]*1147Broom Works not reflected in the balance sheet of September 30, 1918, nor on the books, which were assumed and paid by the taxpayer.
With the first contention of the taxpayer we feel constrained to disagree. While it may be true to a large extent, and the evidence convinces us that such is the fact, that at September 30,1918, and for an extended period of time thereafter, there was no market in which a corn-broom manufacturing business might be disposed of as a going-concern, nevertheless this is not conclusive proof that the individual assets comprising the plant equipment, real property, stock in trade, raw materials, and accounts receivable had no fair market value. In fact, the preponderance of evidence of record indicates that the plant equipment, real property, stock in trade, and raw materials had a fair market value at the date of distribution, though, in the case of the real property, less than that at which it was carried on the books of the liquidating company. And, with respect to the accounts receivable, it could hardly be said that this asset was without a fair value. At least there is no evidence before us to justify such a conclusion.
With respect to the second contention of the taxpayer, considerable merit is lodged therein, but the principle must necessarily be limited in its application to those instances wherein the proof is ample to demonstrate that book values do not reflect fair market values at the basic date. In the present case the evidence is such as to convince us that the fair market value of the land and buildings received by the taxpayer in liquidation was considerably less than the value at which those assets were carried on the books of the Hamburg Broom Works, 'a fact which' will be given more detailed consideration later on in this opinion. On the other hand, the evidence presented as to the fair market value of the other assets received in liquidation is insufficient to convince us that such value was less than the combined book values of those assets.
The taxpayer’s third contention, that the fair market value, if any, of the properties received in liquidation was not in excess of $157,-500, is based upon the proposition that the amount paid by the taxpayer to Oberholtzer and Hess, to wit, $10,500 for 100 shares of the capital stock of the Hamburg Broom Works, just prior to the liquidation of that company, fixes a value for all the stock of that company and by the same token evidences the maximum fair market value of the assets of that company at the date of distribution.
The stock transaction referred to above involved the purchase and sale of but 100 shares, or one-fifteenth of the entire outstanding capital stock of the Hamburg Broom Works. Ordinarily, we would regard the evidence of such transactions as of little consequence when standing alone. However, when we consider the circumstances [1148]*1148surrounding the transactions, through which the taxpayer acquired these shares of stock, in conjunction with other record evidence pertaining to the value of the assets at the date of distribution, we feel convinced that the transactions have considerable weight in establishing the fair market values of the assets received by the taxpayer in liquidation.
As pointed out in our findings of fact, both Oberholtzer and Hess had been employed by the Hamburg Broom Works throughout the period of its coi'porate existence. Oberholtzer, in his capacity as secretary and treasurer, had an intimate knowledge of the financial condition of the company, as reflected by its books of account, while Hess, through his long association with the company in the capacity of factory superintendent and director, was in a position to know full well the results of the operations of the business. By virtue of these circumstances, both of these individuals knew the value of their stockholdings in the Hamburg Broom Works. Neither was under any obligation whatever to the taxpayer. Both knew, when they parted with their stock, of the taxpayer’s intention to dissolve and liquidate the corporation. If either or both had felt that the purchase price Avas not reasonably equiAralent to the full fair value of their stock, they could have elected to await the liquidation of the company, a matter of 30 days hence, to receive their distributive share in the assets of the company. The transactions were conducted at arm’s length. When we are confronted with circumstances such as these, we are inclined to ascribe to such transactions considerable weight as evidence of the value of the assets, where the value so indicated is supported by other corroborative evidence.
The fourth- contention of the taxpayer is severable into four parts, all of which suggest reasons for a revision downward of the Commissioner’s determination of the fair market value of the assets received by the taxpayer in liquidation. The Commissioner determined said value to be $210,277.47, which represents the net book value of the assets, as shown by the balance sheet set out in our findings of fact, plus good will in the amount of $45,452.56, less income and profits taxes of the company for the nine-month period ended September 30, 1918, in the amount of $47,778.42, which were assumed and paid by the. taxpayer. The contention takes up first the propriety of the Commissioner’s action, in increasing the book value of the assets, for the purpose of the determination, by an alleged good will value of $45,452.56.
The story as to how the good will account was arbitrarily written on the books of the Hamburg Broom Works, and as arbitrarily charged off against surplus in the year 1917, is set out in our findings of fact. There we related that the par value'of the capital [1149]*1149stock issued to Schmick in 1913 for the assets of his broom business ivas $18,859.99 in excess of the value of. the tangible assets, the excess being charged to good will account as a mere balancing mtry, and later, during the years 1914, 1915, and 1916, further charges were made to this account in the total amount of $26,592.57, cringing the account up to the total sum of $45,452.56. The entire recount was charged off against surplus, as worthless, in 1917. The evidence is not at all clear, but rather confusing, as to the nature cf the charges made to the good will account in 1914, 1915, and 1916. But it is quite apparent that the good will account was used as a dumping ground, so to speak, for charges which the taxpayer was at a loss to know how to otherwise dispose of.
The facts in the case relating to the Commissioner’s determination take a peculiar turn. The Commissioner has held that the cost of the original stock to the taxpayer should be based upon the value of the tangible assets paid in to the company by the taxpayer in 1913. In so doing he disregards the arbitrary charge in 1913 to good will account, on the books of the Hamburg Broom Works in the amount of $18,859.99, as a mere balancing entry. Yet, for the purpose of determining the fair market value of the assets received by the taxpayer in liquidation, the Commissioner includes in his computation a value for good will measured by the sum of the balancing entry made to the good will account in 1913 plus the subsequent arbitrary charges to the same account. Had not these arbitrary charges to the good will account been made, the account would not have appeared upon the books at all; and the Commissioner, predicating his determination of the fair market value of the assets distributed in liquidation upon book values, would have disregarded the good will entirely, or would have resorted to other means to determine its fair market value, if any, when received by the taxpayer. As a matter of fact the Hamburg Broom Works, realizing the error of making these arbitrary charges to good will account and sensing the worthlessness of the account, had eliminated it from the books in 1917, so that no good will appeared in its accounts at the date of liquidation.
In view of the foregoing, we are convinced that the basis used by the Commissioner in his determination of the value of the good will, alleged to have been received by the taxpayer in liquidation of the Hamburg Broom Works, is erroneous, and that, by the same token, the Commissioner’s good will valuation of $45,452.56 is erroneous.
Passing on to the proposition as to the fair market value of the real property received in liquidation by the taxpayer, we find that the same was carried on the books of the Plamburg Broom Works at a value of $70,211.96, which the Commissioner adopted as the fair [1150]*1150market value at the date of distribution. We are convinced from the evidence that the value was much less.
The real property in question consisted of the old building in which the taxpayer conducted his business prior to 1912, the new building which he constructed in 1911-12, and the land upon which these buildings stood. The cost of these properties, as shown by the balance sheet in our findings of fact, was $70,211.96, against which some part of the depreciation reserve applied. But viewed in the light of the proven facts in this case, we do not believe that the depreciated cost represented their fair market value at the date of distribution, and especially is this true with respect to the new building constructed in 1911-12.
On the witness stand the taxpayer and other witnesses testified as to the adequacy of the old building to meet the then and pro- j spective needs of the taxpayer’s business. They testified that the old j building was sufficient in capacity and stability to take care of the growing business, and that the efficiency of the operations conducted therein was never exceeded in the new building. These things are confirmed in a large measure by the fact that, after he sold the real property in 1921, the taxpayer removed his business to the old building, which he had secured under lease, and there conducted the operations of the business until he abandoned it in 1923.
But in the 20 years he had been engaged in the corn-broom manufacturing business prior to 1913, the taxpayer had met with considerable success. From an original plant assembled with $200 of borrowed money, by 1913 the plant had grown to be one of the largest engaged in the corn-broom industry. Proud of his achievements, the taxpayer conceived the idea of erecting a monument testifying to his success and attainments in the corn-broom business. To satisfy his vanity, as the taxpayer himself puts it, he constructed what he proposed should be “ the finest broom factory in the country.” The building was constructed upon a sandstone foundation, trimmed with Indiana limestone, and in a conspicuous place in the outer wall a corner stone was placed bearing the inscription “ Erected by Wilson E. Schmick 1911-12.” That the building-should be no less a monument to his pride and success after it passed from his possession, a provision was included in the sales agreement “ that the tablet stone placed in the corner of the building with the inscription ⅝ * * shall be preserved unchanged as long as the building stands.”
However, when the taxpayer sought to dispose of the building-through the years 1918 to 1921, he found no ready market for a manufacturing building of this character and type of construction, notwithstanding the taxpayer’s determined efforts to so dispose of it. Finally, in 1921, the real property, including this building, was [1151]*1151sold to a concern engaged in the business of manufacturing knitted underwear, at a price of $50,000.
The witness Duvall testified .that for the past 20 years he has been engaged in the real estate brokerage business in the vicinity of Hamburg, Pa.; that he is at present assessor for Eeading County, in which county Hamburg is located; that for the past 20 years he has been employed by the Pennsylvania Trust Co. to appraise properties upon which mortgages were sought; that he has been employed from time to time by the Eeading Eailroad Co. to fix damages in the abolition of grade crossings; that he examined the real properties formerly owned by the Hamburg Broom Works; that the fair market value of such properties in 1918 was from $30,000 to $38,000; and that, between the years 1918 and 1921, there was a considerable increase in the value of real property in Hamburg and contiguous territory.
The taxpayer points out that the Commissioner, in his determination of the fair market value of the assets received in liquidation on the basis of book values, failed to take into consideration the liability of the Hamburg Broom Works to the People’s National Bank of Waterville, Me., in the sum of $8,925, on a note discounted with that bank on August 1, 1918, which liability was assumed and paid by the taxpayer.
The evidence on this proposition, however, shows conclusively that the bank, on September 30, 1918, drew a draft in the sum of $8,925 on the Hamburg Broom Works, which was accepted and paid the same day by that company; that the taxpayer did not assume this obligation; and that the liquidation of this note was given effect in the balance sheet of the Hamburg Broom Works of September 30, 1918, upon which the Commissioner relied as reflecting book values.
The taxpayer further points out that the Commissioner failed to take into consideration the payment of $15,000 made by the taxpayer to the Hollingsworth & Whitney Co. in 1923, in settlement of damages awarded against him in the same year, by a jury in the United States District Court for the Eastern District of Pennsylvania, in connection with a contract executed by the taxpayer in 1913 for the purchase of a quantity of logs from the Hollingsworth & Whitney Co., as well as the further sum of $7,TT5, representing attorneys’ fees paid during the years 1920, 1922, and 1923, in connection with this litigation. The taxpayer contends that these were obligations assumed by the Hamburg Broom Works when it took over his business in 1913. The evidence before us is not sufficient, however, to convince us that such is the fact.
[1152]*1152The liabilities assumed by the Hamburg Broom Works in 1918, as a part consideration for the business of the taxpayer, were solely those representing his business indebtedness — the indebtedness incurred in carrying on his broom manufacturing business. What relation these obligations for damages awarded the Hollingsworth <& Whitney Co. and for attorneys’ fees bore to his broom manufacturing business has not been disclosed to us. On the record, we doubt that they were connected in any way with the business taken oyer by the Hamburg Broom Works in 1918.
The facts hereinabove pointed out with respect to the good will and real property values as of September 30, 1918, as determined by the Commissioner, show conclusively that the book values used by him in his computation of the taxpayer’s profit on this transaction ¿re considerably in excess of the fair market value of the assets received.
In the light of the facts, as we have found them to be, and in view of the reasons set out in this opinion, we believe that the fair market value of the assets received by the taxpayer in liquidation of the Hamburg Broom Works was not in excess of $157,500, and the computation of the gain should be made on this basis.
Order of redetermination will be entered on 10 days' notice, under Rule 50.