H. A. Mihills, C.P.A., for the petitioner.

R. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.

Respondent has determined deficiencies in income tax for the years 1925 and 1926 in the respective amounts of $5,508.54 and $509.68. Petitioner contends that these determinations are erroneous because (1) respondent failed to deduct from income for 1925, $48,123.26, the amount of the loss sustained upon liquidation of a corporation of which petitioner had purchased all the capital stock, and (2) respondent failed to eliminate from 1926 income as reported by petitioner $4,000, the amount realized in that year upon a part of certain securities received by petitioner in the liquidation mentioned.

FINDINGS OF FACT.

Petitioner is an Indiana corporation, having its principal office in Indianapolis, where for many years it has been engaged in the hardware business, both wholesale and retail, specializing in mill supplies and cabinet hardware.

785*785 For many years prior to 1925 the Lilly Hardware Co. had been engaged in the hardware business, mainly as a general retailer, in the building adjoining petitioner's place of business. Early in that year petitioner's officers learned that the owners of the Lilly Co. wished to dispose of the business, and negotiations were entered into which, on July 2, 1925, terminated in an agreement to sell all the capital stock of the Lilly Co. to petitioner for $230,000, the former stockholders to retain a $5,000 insurance policy upon the life of one of their company's officers, and to retain also, various securities carried on their books at $10,150. For several years prior to this time, the Lilly Co. had operated at a loss and for that reason, and because of the difference in character of the two establishments, the Lilly Co. had little, if any, good will and that item was not considered in the transaction. Petitioner had intended to purchase the assets of the Lilly Co.'s business but purchased instead the stock, at the suggestion of the vendor's representatives. However, petitioner had no intention of operating the Lilly Co., but planned to liquidate the business immediately. The corporation was not dissolved, but after the purchase of its stock by petitioner it no longer engaged in business, being continued only for the collection of its accounts receivable.

Shortly after the deal was closed, petitioner notified the agent for the Lilly interests that it believed the assets were not worth the price agreed upon, and the agent agreed to withhold from the purchase money $30,000, which it was thought would cover the shortage, until petitioner had finished taking an inventory and examining the assets generally. A special sale was conducted by which to dispose of the merchandise of the Lilly Co., but this was not as successful as anticipated and petitioner had to take over into its own stock a substantial amount of the merchandise inventory of the Lilly Co.'s business. An account was opened on petitioner's books in which were recorded as debits all payments made in purchase of the capital stock, including obligations paid for the account of the Lilly Co., and in which were recorded as credits all amounts received from sales of merchandise, refunds made by the Lilly agent, the fair market value of items of equipment and merchandise taken over by petitioner, and the sound value of the outstanding accounts receivable from the Lilly Co.'s customers. The values thus set up for equipment and inventory items were determined by petitioner's manager and buyers, after an examination of these assets and reference to manufacturers' price lists. The values set up for the accounts receivable were determined by the credit managers of the two concerns after detailed investigation of the accounts and data respecting the financial condition of the various debtors. It soon appeared that the assets of the Lilly Co., thus valued, failed to equal the purchase price 786*786 and consequently the former Lilly stockholders, contending they were unable to do more, refunded to petitioner a total of $42,017.83, consisting of cash payments of $15,076.84, $6,836.84, and $5,000, net proceeds of an insurance policy on the life of one of the officers of the Lilly Co., which meantime had matured, in the amount of $4,954.15, and securities listed at $10,150. This item of securities was not entered in the above mentioned account on petitioner's books. The difference, as shown by the account, between the amount paid out in purchase of the stock and the amounts received in liquidation of the Lilly Co.'s business, consisting of cash received from sales and as refunds from the vendors, the collections on accounts, and fair market value of items of equipment and merchandise taken into petitioner's inventories, was $48,123.26, and this amount petitioner claimed as a loss deductible from its income for 1925, the liquidation having been completed within that year. This claim, respondent has disallowed, and that action gives rise to the deficiencies herein, since upon its return, petitioner showed a net loss for 1925 which was carried over to be applied against 1926 income.

In 1926 petitioner received $4,000 upon partial liquidation of the stock of the Central States Bridge Co., one of the securities transferred to it in settlement by the Lilly Co. This amount petitioner reported as a part of its income for 1926, but now alleges that it erred in so doing. The record discloses no facts respecting the identity or values of the securities so received.

OPINION.

GOODRICH:

Respondent has disallowed as a deduction from income for 1925 the amount of $48,123.26, claimed by petitioner as a loss sustained upon the liquidation of the Lilly Hardware Co., the stock of which petitioner purchased at the initial price of $230,000, which was later reduced by cash refunds from the vendors totaling $31,867.83, and the transfer of various securities valued on the Lilly Co.'s books at $10,150. As counsel for respondent presented no evidence, made no statement of his case and filed no brief, the record makes no disclosure respecting the reason for respondent's action nor the ground of his defense, beyond a brief statement in the deficiency notice that he relies upon article 292 of Regulations 69. In our opinion, the cited authority is not applicable to the case.

It seems clear that this transaction — the purchase of the stock of the Lilly Co., immediately followed by liquidation and distribution of the corporate assets — is one upon which gain or loss is to be recognized. Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544; Riggs Nat. Bank, 17 B.T.A. 615; affd., 57 Fed. (2d) 981; Canal-Commercial 787*787 Nat. Bank, 22 B.T.A. 541; affd., 63 Fed. (2d) 619; Warner Co., 26 B.T.A. 1225.

Section 201 (c), Revenue Act of 1926, provides that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock. Cf. Henry B. Babson, 27 B.T.A. 859. Where, as here, property is received in such a distribution, under the provisions of section 202 (c) of the same act, the amount realized upon the distribution is the fair market value of the property. Robert Jemison, Jr., 3 B.T.A. 780; George Theis, Jr., 3 B.T.A. 1030; Joseph Joseph, 6 B.T.A. 595; Alice M. Hastings, 8 B.T.A. 670; M. S. Engleman, 8 B.T.A. 1289; R. A. Patout, 10 B.T.A. 1357; H. E. Bullock, 12 B.T.A. 51; Ben Stocker, 12 B.T.A. 1348; Romie C. Jacks, 19 B.T.A. 559; G.C.M. 621, V-2 C.B. 5. While it is true that the Lilly Co. was not immediately dissolved, that fact did not prevent its liquidation, for after its stock was purchased by petitioner its regular business terminated and its existence was continued for the restricted necessity of proceedings for the collection of its outstanding accounts. Fred T. Wood, 27 B.T.A. 162, and cases there cited. The question then becomes, What was the fair market value of the assets of the Lilly Co. at the time acquired by the petitioner through liquidation?

We are satisfied that this value is accurately reflected by petitioner's records. The proof is that the values placed on various items of equipment and merchandise inventory were determined by men competent to adjudge thereof after examination of the assets, and reference to price lists, and that the value placed on the accounts receivable was determined cooperatively by the credit managers of the two concerns, who were informed as to the details of the accounts and the financial circumstances of the customers. Petitioner has met the burden of substantiating its determination of the fair market value of the assets received by it in the liquidation and they should be used in determining the loss sustained therefrom. Moreover, we are convinced that no part of the consideration for the stock of the Lilly Co. may be assigned to the purchase of good will, or to effecting the elimination of a competitor. The evidence concerning the operations of the Lilly Co. discloses that it had no good will of value; that because of the divergence in the character of the business of the two concerns the Lilly Co. did not seriously compete with petitioner; and that very little additional business was gained by petitioner as a result of the cessation of the Lilly Co.'s operations.

However, the loss upon this transaction as computed and claimed by petitioner must be reduced in the amount of $10,150, representing the book value of the securities transferred to it by the Lilly Co.'s stockholders in reduction of the purchase price, for, while there 788*788 is some indication that these securities were not worth that amount, there is no evidence from which we can determine what their correct value was at that time and, perforce, we must accept the value reflected by the records of the Lilly Co. and recited in the memorandum of final settlement between the parties. These securities were not included in petitioner's account of the transaction. They should be so included, with the result that the cost of the stock is further reduced in the amount of $10,150 and the loss sustained upon the liquidation is reduced to $37,973.26, which should be deducted from petitioner's income for the year 1925.

Our conclusion respecting the value of the securities in the transaction necessarily disposes of petitioner's contention that $4,000 realized upon sale of a part of them in 1926 should not be included in income for that year, in accordance with its return. Perhaps a part of the sum so realized is a return of capital, but there is no evidence of record from which we can make such a determination. Therefore, for failure of proof, we hold that respondent was not in error in including in petitioner's income for 1926 the full amount realized of $4,000.

Judgment will be entered under Rule 50.

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