and Pease secured notes above referred to which were paid by the Auto Co. after it acquired the property, declining to allow the asserted additional cost of approximately $25,000 represented by the six unsecured notes above referred to which were charged off by the bank in 1922 and deducted from its income tax return. Respondent apportioned the allowed cost of $20,000 in the ratio of 20/45 for the land and 25/45 for the building. In computing gain from the 1939 sale for $36,000, respondent allocated $26,000 for the land and $10,000 for the building, resulting in the determination of a net gain of $27,111.11 or $17,111.11 in excess of that reported by Texas Auto Co. Petitioners do not dispute respondent's computation of the gain if respondent's determination of the basis is sustained. The claim of petitioners Vandenberge, Blackburn, and Wallace to an offset in the event the deficiencies be sustained is grounded upon the fact that in 1939 Auto Co. paid a liquidating dividend of $19,500 from the sale of said realty, of which each received $6,500. Each of them reported and paid individual income tax for that year with respect thereto in varying brackets. Should the deficiencies be determined against Auto Co., they contend that the dividend upon which their individual taxes were thus paid would be thereby decreased to the extent of the deficiency, plus interest, and that the amount of the tax paid by each with respect to such reported but unrealized income should be allowed as an offset against their joint liability as transferees. On this point it is stipulated: in the event the court should determine that the petitioners transferees are entitled to offsets as defined in paragraph 12 above, that the amounts of the offsets, excluding interest, shall be as follows: Vandenberge $359.94 Wallace 146. 40 The first question which we have to decide is the correct basis of the property which Auto Co. purchased in 1922 from J. C. Blacknall Co. Petitioners claim a basis of $45,000 for this property and have allocated $20,000 to the land and $25,000 to the building. The Commissioner has determined a cost basis of $20,000 and has allocated $8,888.89 to the land and $11,111.11 to the building. If the Commissioner is sustained in his determination of the basis, petitioners do not complain of his allocation of cost between the land and the building. The Commissioner has determined petitioners' cost basis to be $20,000 because that is all that petitioners ever paid for the property. We think his determination must be sustained under the facts which have been stipulated. The applicable provisions of the Internal Revenue Code are printed in the margin.1 Petitioners concede that Auto Co. itself only paid $20,000 for the property in question, but they contend that it is entitled to add to its cost basis $24,567.16, representing the face value of six unsecured notes which J. C. Blacknall and his associate companies owed the City National Bank of Corpus Christi, Texas, at the time Auto Co. purchased the property, which notes the bank agreed to cancel under certain conditions if Blacknall would cause the property to be conveyed to Auto Co. The principal case which petitioners urge in support of their contention is Arundel-Brooks Concrete Corporation v. Commissioner, 129 Fed. (2d) 762. In that case the taxpayer erected a plant which cost $40,000. Of this amount the taxpayer paid out of its own funds $20,000, and $20,000 was contributed by the Maryland Slag Co. The Board sustained the Commissioner in his determination of a cost basis to the taxpayer of $20,000. See 45 B. T. A. 178. The Circuit Court reversed the Board and held that the taxpayer in taking depreciation was entitled to a cost basis of $40,000, although it had actually paid out of its own funds only $20,000, the court saying: * And even though part of the money was donated by an interested party, the total cost of the asset, not the net cost to the taxpayer, is the proper basis to be used in determining depreciation as well as gain or loss, if the asset belongs solely to the taxpayer. Even if we assume that the Arundel-Brooks case was correctly decided by the court, it is not applicable to the facts of the instant case. In the first place, no outside party contributed anything in cash toward 1 SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) BASIS (UNADJUSTED OF PROPERTY.-The basis of property shall be the cost of such property; (b) ADJUSTED BASIS.-The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. (1) GENERAL RULE.-Proper adjustment in respect of the property shall in all cases be made (B) In respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this chapter or prior income tax laws. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (1) DEPRECIATION.-A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (a) BASIS FOR DEPRECIATION.-The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property. the purchase by Auto Co. of the property involved here. Clark Pease, who was a stockholder in Auto Co. and also in the bank at the time Blacknall Co. conveyed the property to Auto Co., procured the consent of the bank to cancel six unsecured notes owed by Blacknall and his associate companies to the bank. There is no evidence that petitioner has ever paid anything to the bank in consideration of its cancellation of these notes. Petitioners do not so contend. But they contend that this cancellation of these notes was a contribution by Pease to the capital surplus of petitioner and therefore should be added to its cost basis of the property. But the bank which made the cancellation was not a stockholder of Auto Co. It is true that Pease was a stockholder of Auto Co. and the controlling stockholder of the bank, but it would require a complete disregard of the corporate entity of the bank to hold that Pease, as a stockholder of Auto Co., contributed to its capital surplus by inducing the bank to cancel the six unsecured notes which Blacknall and his associate companies owed the bank. This disregard of corporate entity we are not privileged to make, but even if we were, it would not help petitioner. Even if we were to assume that Pease, as a stockholder of Auto Co., contributed the six notes in question to its capital surplus, there is no evidence that they had any value. The inference is to the contrary. It is stipulated as to these notes that: On its Federal income tax return filed by said bank for the taxable year ending December 31, 1922, the said bank charged off notes payable by Blacknall and/or his said companies, totalling $25,140.00, including said amounts of $24,567.16 covered by the notes referred to above, upon which notes there have been no subsequent recoveries by the bank. Thus it seems clear that the facts in the instant case are distinguishable from those present in Arundel-Brooks Concrete Corporation v. Commissioner, supra, in that in the Arundel case the Maryland Slag Co. did actually contribute $20,000 cash toward the erection of the plant, whereas in the instant case we would be unable to hold that either the bank or Pease contributed anything of value toward the purchase price paid by Auto Co. for the property in question. But even if the facts here were not distinguishable from those present in the Arundel case, we would still decide the issue as to basis in favor of the Commissioner. When petitioners filed their brief they conceded that the court in Detroit Edison Co. v. Commissioner, 131 Fed. (2d) 619, had said that the conclusion therein reached was in conflict with the holding in the Arundel-Brooks case. On account of this conflict the Supreme Court granted certiorari in the Detroit Edison Co. case, and in Detroit Edison Co. v. Commissioner, 319 U. S. 98, it affirmed the Sixth Circuit, which had affirmed the Board, 45 B. T. A. 358. Following the Supreme Court's decision in Detroit Edison Co. v. Commissioner, supra, we sustain the Commissioner in his determination of petitioners' cost basis of the property involved here. In thus deciding, it means that petitioners' assignment of error as to depreciation disallowed of $1,400 in 1938 and their assignment of error as to computation of the profits on the sale in 1939 are not sustained. Having decided the main issue against petitioners, it becomes. necessary to pass upon the alternative contention of petitioners, Vandenberge, Blackburn, and Wallace, which is to the effect that they are entitled to an offset against their liabilities as transferees of overpayments made on their individual income taxes in 1939 which will result from their having to pay the tax liabilities of the transferor for the years 1938 and 1939, involved in these proceedings. If petitioners are entitled to such offsets; the stipulated facts agree how much they shall be. We think petitioners' alternative contention must be denied. We do not have before us for adjudication the individual income tax liabilities for 1939 of Vandenberge, Blackburn, and Wallace. We have no jurisdiction to determine in these proceedings any overpayments of their 1939 individual income tax liabilities which will result from our decision in these proceedings. We have before us only the income tax and excess profits tax liability of the transferor, Texas Auto Co., and the secondary liabilities of Vandenberge, Blackburn, and Wallace, as transferees. Section 53.43, Mertens Law of Federal Income Taxation, vol. 9, says: Effect of Determination of Other Tax Liability of Transferee. The personal tax liability of an individual is a thing separate and apart from his liability as transferee of the assets of another taxpayer. * * Stockholders may not, in a transferee proceeding against them, offset any part of the personal taxes already paid by them on reported profits received in the distribution of the corporation's assets, which profits must necessarily be reduced by the recovery ailowed the government in the equity suit. See United States v. Tillinghast, 55 Fed. (2d) 279; affd., 69 Fed. (2d) 718 (C. C. A., 1st Cir.), on another point. An earlier case by the Second Circuit, United States v. Klausner, 25 Fed. (2d) 608, is to the contrary of the Tillinghast case. The court, however, in the Klausner case granted the claimed offset strictly on equitable grounds. That fact is clearly shown from the following quotation from the court's opinion: This is a suit in equity, and the plaintiff must do equity if it is to get equitable relief. Therefore, while the tax of Crystal Knitting Mills must be calcu lated as plaintiff contends, the defendants will be entitled to a credit of any overpayment they may have made on their 1919 taxes by reason of reporting $50,000 each as income from a sale of his stock. This will require recalculations for several years, and probably a reference to a master if the parties cannot agree. * We are not a court of equity and have power to exercise only the jurisdiction which Congress has imposed upon us by statute. This 'much has been decided by the Supreme Court as recently as December 6, 1943. See Commissioner v. Gooch Milling & Elevator Co., 320 U. S. 418. In that case the Supreme Court, among other things said: We are not called upon to determine the scope of equitable recoupment when it is asserted in a suit for refund of taxes in tribunals possessing general equity jurisdiction. Cf. Bull v. United States, 295 U. S. 247; Stone v. White, 301 U. S 532. But its use in proceedings before the Board is governed by the circumscribed jurisdiction of that agency. The Internal Revenue Code, not general equitable principles, is the mainspring of the Board's jurisdiction. * As we have already stated, we do not have before us the determination of the individual income tax liabilities of Vandenberge, Blackburn, and Wallace for 1939. Therefore, we have no jurisdiction to require that overpayments which they may have made in their individual.income taxes for the year 1939 shall be credited to their liabilities as transferees of Texas Auto Co. The alternative assignment of error is, therefore, not sustained. Decisions will be entered for the respondent. THOMAS K. GLENN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 108437. Promulgated February 22, 1944. 1. Petitioner in January 1933 transferred his home and other real property of less value to a corporation newly formed by him, in consideration of all of its stock, and hypothecated the stock to obtain listed stock which could be used as coliateral with his creditors. Later he transferred life insurance and stock to the corporation. The corporation held the properties, but transacted no business. Held, on the facts, that the corporation should not be recognized as a taxable entity separate from the petitioner, and that there was no error in denying loss claimed upon liquidation of the corporation in April 1935 and distribution to petitioner of the assets transferred to it by him. 2. Held, following Gus T. Dodd, 46 B. T. A. 7; affd., 131 Fed. (2d) 382, that petitioner is taxable upon all gain realized in an exchange of stock, held to constitute a distribution in partial liquidation; and is entitled to loss upon the sale of stock after receipt thereof in such partial liquidation. John E. McClure, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. This proceeding involves the redetermination of deficiencies in income tax for 1935 and 1936 in the respective amounts of $19,651.97 |