Before GOODRICH and MCLAUGHLIN, Circuit Judges, and KALODNER, District Judge.
KALODNER, District Judge.
This is a petition to review the decision of the Tax Court. It involves a deficiency in income taxes for the year 1937. The petitioner was a member of a co-partnership trading as N. W. Ayer & Son, an advertising agency. On January 1, 1927, he held a 10% interest in the partnership. On May 1, 1929, the business and assets of the partnership were transferred to a corporation, N. W. Ayer & Son, Incorporated, pursuant to a contract between the partners and the newly-formed corporation, and thereupon the corporation's shares of stock were issued to the partners in proportion to their respective partnership interests. On January 4, 1937, the petitioner sold his stock in the corporation.
It is agreed that under the provisions of the Revenue Act of 1928, 26 U.S. C.A. Int. Rev. Acts, page 351 et seq., no gain or loss was recognized from the exchange on May 1, 1929, and that the corporate stock received from the exchange takes the same base as the partnership interests. Accordingly the petitioner was entitled, under Section 117(c) (1) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 874, to tack onto the period during which he held the stock the additional period during which he had held the property exchanged for the stock. Thus, as in Kessler v. United States, 3 Cir., 124 F.2d 152, 154, where the taxpayer was also first a partner in N. W. Ayer & Son and then a stockholder in N. W. Ayer & Son, Incorporated, the single question here is "What was the property exchanged?Was it the petitioner's partnership interest, as he contends, or was it his interest in the assets of the partnership, as the government urges?"*fn1 The answer must be found in the available records chronicling the transaction.
The facts as found by the Tax Court, are substantially as follows. 2 T.C. 220.
N. W. Ayer & Son, a co-partnership, conducted the business of an advertising agency for many years prior to January 1, 1923. Between January 1, 1923, and January 1, 1927, the taxpayer acquired various interests in the partnership by purchase so that on January 1, 1927, he owned a 10% interest. It is stipulated that the 10% interest had a cost basis of $271,949.15 for purposes of determining gain or loss.
From December 29, 1926, the partnership operated under articles of co-partnership dated December 29, 1926, which were in effect from January 1, 1927, until the partnership was dissolved in 1929.
On April 23, 1929, the partners decided to incorporate the advertising business then conducted by them through the partnership, under the terms of an agreement executed on April 23, 1929, by all of the partners. The agreement provided that a Delaware corporation should be organized prior to May 1, 1929, to be known as N. W. Ayer & Son, Incorporated, and to be registered in Pennsylvania for the purpose of conducting business in that state. The agreement provided, inter alia, as follows:
"4. Partners agree, in respect to the undistributed profits which were standing to their respective credits on the partnership books at the close of business on December 31, 1928, that such balances thereof as remain undistributed at the close of business on April 30, 1929, shall for the time being be loaned by Partners to the corporation which shall pay for the use of the same interest at the rate of 6% per annum.
"6. On May 1st, 1929, or as soon thereafter as possible but as of May 1st, 1929, the entire assets of N. W. Ayer & Son (of Philadelphia) including all the accounts, contracts, books, claims, causes of action, good will, and all rights of every kind and nature, and all property, real, personal and mixed to which said partnership is then legally or equitably entitled shall be conveyed, assigned, set over, and transferred to said corporation subject, however, to all the partnership liabilities which said corporation shall expressly assume.
"7. In exchange for the assets so to be transferred and in consideration of the agreements of the Partners as hereinafter set forth, there shall be issued to the respective Partners in full payment for their respective interests in said assets, full paid and non-assessable common capital stock of said corporation as follows:
William M. Armistead 76,106
George H. Thornley 76,106
"11. The partnership N. W. Ayer & Son (of Philadelphia) shall be dissolved and the Articles of Partnership terminated as of April 30th, 1929."
The corporation, N. W. Ayer & Son, Incorporated, was organized on April 24, 1929, with an authorized capital of 1,000,000 shares without nominal or par value, for the purpose of engaging in and carrying on the general advertising business which had been conducted by N. W. Ayer & Son, the partnership.
Pursuant to a resolution adopted at a meeting of the directors of the corporation held on April 29, 1929, the corporation, through its president, ratified, confirmed, and adopted the agreement of April 23, 1929, and agreed to do all the acts on its part which were called for by the agreement. Such ratification by the corporation was made by an execution of the agreement on April 29, 1929, by the corporation, whereby the corporation became a party to the agreement of April 23, 1929.
On May 1, 1929, all the assets and property of every kind and nature whatsoever, which were previously owned and held by N. W. Ayer & Son, the partnership, were transferred to N. W. Ayer & Son, Incorporated, subject, however, to all outstanding liabilities and indebtedness of the partnership which were assumed by the corporation. On May 1, 1929, a bill of sale was executed by the five individuals who were co-partners in the firm of N. W. Ayer & Son. The bill of sale provided as follows, in part:
"Know All Men by These Presents, that we, Wilfred W. Fry, William M. Armistead, James M. Mathes, Adam Kessler, Jr., and George H. Thornley, co-partners trading as N. W. Ayer & Son, for and in consideration of the sum of One Dollar and other good and valuable considerations moving unto each of us from N. W. Ayer & Son, Incorporated, a corporation organized under the laws of the State of Delaware, all as more fully set forth in a certain Agreement dated April 23rd, 1929, providing for the incorporation of the partnership, N. W. Ayer & Son, the receipt whereof is hereby acknowledged, Do hereby grant, sell, assign, transfer and deliver unto the said N. W. Ayer & Son, Incorporated, the entire plant, property, machinery, equipment, fixtures, business and good will of the N. W. Ayer & Son partnership including all book accounts and accounts receivable outstanding, contracts, copyrights, trade marks, claims, causes of action, and all rights and all assets and property of any kind or nature whatsoever belonging or appertaining to the said partnership and to the business thereof, subject, however, to all the adjustments to be made as more fully set forth in said Agreement of April 23rd, 1929, and further subject to all outstanding liabilities and indebtedness of said partnership, which the said corporation, N. W. Ayer & Son, Incorporated, hereby assumes, to have and to hold said property to the said N. W. Ayer & Son, Incorporated, and its successors and assigns, to their own use and behoof forever."
On May 1, 1929, N. W. Ayer & Son, Incorporated, issued 761,061 shares of its full paid and non-assessable common capital stock to the respective partners in proportion to their respective partnership interests.The taxpayer received 76,106 shares of this stock from the corporation for his interest in the partnership.
It has been stipulated by the parties that:
"Under the provisions of the Revenue Act of 1928, no gain or loss was recognized to the partnership or to the partners as individuals upon the transactions hereinabove set forth, and under that act, the basis to the Petitioner, (George H. Thornley) for determining gain or loss upon the subsequent sale of the stock of N. W. Ayer & Son, Incorporated, which he received, was the same basis as that of his partnership interest, namely, $271,949.46."
On January 4, 1937, the taxpayer owned 71,356 shares of N. W. Ayer & Son, Incorporated, capital stock, which he sold on that date, realizing therefrom a capital gain ...