OPINION.
GREEN:
The deficiency here in controversy arises as the result of the determination of the Commissioner that the petitioner realized taxable income in the amount of $75,000 on the basis that he received $75,000 from Inecto, Incorporated, of Delaware in exchange for his secret process or formula which had cost him nothing. On the other hand, it is the petitioner's contention that under section 202(c) (3) of the Eevenue Act of 1921 he realized no taxable income for the reason that looking at the transaction as a whole, he had merely transferred property to a corporation and immediately after the transfer was in control of such corporation.
The section relied upon by the petitioner provides in part as follows:
(c) for tlie purposes of tliis title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in. exchange has a readily realizable market value, no gain or loss shall be recognized—
(3) When (A) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any snch property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. Bor the purposes of this paragraph, a person is, or two or more persons are, " in control " of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
It is clear that had Inecto, Incorporated, of Delaware, endorsed the check of $75,000 over to the New York corporation in exchange for all its own stock and then exchanged its own stock for the petitioner's secret process, this question could not have arisen. Does the fact that all the parties to the transaction agreed between themselves upon this indirect method of first having the Delaware corporation endorse the check over to the petitioner in exchange for his secret process or formula and then having the petitioner endorse the check over to the New York corporation in exchange for the Delaware corporation's stock, take the transaction out of section 202(c) (3) supra. We think not. The petitioner at no time had any proprietary right in the check for $75,000. He had no right to use it and employ it as his own. It had been suggested that the check be endorsed directly to Inecto, Incorporated, of New York, but Ducker's attorney had refused to part with the stock unless the check first went through the petitioner's hands. It was not intended that Evans was to have any control over the check. He was to transfer his formula to the Delaware corporation and although the check was first endorsed to him, it was not intended that he was to receive anything except all the capital stock of the Delaware corporation.
The respondent contends that the solution to the question here is controlled by the decisions of this Board in the appeals of Edward A. Langenbach, 2 B. T. A. 777; B. F. Saul, et al., 4 B. T. A. 639; and W. J. Hunt, 5 B. T. A. 356. In our opinion those cases are not in point for the reason that the questions, facts, and statutes involved therein were entirely different. The peculiar wording of the 1921 Act is a complete departure from the prior acts under which the three cited cases were decided. The Senate Finance Committee at page 11 of its Beport No. 275, refers to this complete change in the law in the following language:
Section 202 (subdivision c) provides new rules for those exchanges or " trades " in which, although a technical " gain " may be realized under the present law, the taxpayer actually realizes no cash profit.
Under existing law " 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 Probably no part of tbe present income tax law bas been productive of so much uncertainty or bas more seriously interfered with necessary business readjustments. The existing law makes a presumption in favor of taxation. The proposed act modifies that presumption by providing that in the case of an exchange of property for property no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value, and specifies in addition certain classes of exchanges on which no gain or loss is recognized even if the property received in exchange has a readily realizable market value. These classes comprise the cases where an individual or individuals transfer property to a corporation and after such transfer are in control of such corporation.
The preceding amendments, if adopted, will, by removing a source of grave uncertainty and by eliminating many technical constructions which are economically unsound, not only permit business to go forward with the readjustments required by existing conditions but also will considerably increase the revenue by preventing taxpayers from taking colorable losses in wash sales and other fictitious exchanges.
In order to come within the statute under which the petitioner claims exemption, it is only necessary for him to show (1) that he transferred property to a corporation, and (2) that immediately after such transfer he was in control of such corporation. It is admitted that he transferred the secret process to the Delaware corporation. The only question remaining is whether it can be said that he was in control of the corporation immediately after the transfer. The evidence shows that prior to the transfer it was agreed that Evans was not to have any rights in the check, but that immediately he was to endorse it over to the New York corporation and receive simultaneously all the stock of the Delaware corporation. Ducker would not part with control of the stock except it be done in that manner. Under such circumstances, it is our opinion that Evans acted as a mere conduit to pass the check from the Déla-' ware to the New York corporation and that he realized no taxable gain or loss on the transaction.
Keviewed by the Board.
Judgment will he entered on IB days' notice, under Rule 50.