APPEALS OF J. E. CHANDLER AND E. B. TEAGUE.Chandler v. CommissionerDocket Nos. 4039, 4040.United States Board of Tax Appeals3 B.T.A. 146; 1925 BTA LEXIS 2027; November 24, 1925, Decided Submitted October 23, 1925.  1925 BTA LEXIS 2027">*2027 George E. H. Goodner, C.P.A., for the taxpayers.  W. F. Gibbs, Esq., for the Commissioner.  3 B.T.A. 146">*146  Before LITTLETON, SMITH, and TRUSSELL.  These appeals are from determinations of deficiencies in income tax for the years 1919, 1920, and 1921, in the amounts of $2,299.78, $24.90, and $5.13, respectively, as to J. E. Chandler, and in the amounts of $6,878.81, $61.12, and $37.84, respectively, as to E. B. Teague.  Separate appeals were filed but they were heard together by consent.  The issues presented are whether the Commissioner erred (1) in his determination of the value of 197 shares of the 3 B.T.A. 146">*147  capital stock of the Pioneer Lumber & Creosoting Co. owned by the Advance Lumber Co. at the time of its dissolution on August 1, 1919; (2) in holding that the value of property received by taxpayers upon liquidation of the corporation in excess of the cost of their stock was subject to the normal tax; and (3) in holding that premiums on policies of life insurance taken out upon the lives of the taxpayers and paid by the partnership, of which they were members, were not proper deductions as ordinary and necessary expenses.  FINDINGS OF FACT.  Taxpayers are1925 BTA LEXIS 2027">*2028  residents and citizens of Birmingham, Ala.  In November, 1918, the Advance Lumber Co., hereinafter referred to as the Advance Company, a corporation, the entire capital stock of which they owned in the proportion of one-third and two-thirds, respectively, purchased 197 shares of capital stock of the Pioneer Lumber & Creosoting Co., hereinafter referred to as the Pioneer Company, for which it paid $17,400.  The Pioneer Company was organized in 1911 and had operated with little success in the way of profits until 1917.  For about five years prior to 1919 the Advance Company had an arrangement with the Pioneer Company whereby the former furnished the lumber, poles, tiling, ties, etc., which were treated by the latter for a stipulated price, after which the material was sold by the Advance Company.  The Pioneer Company agreed not to take business from others and to permit the Advance Company to store its stock in the yards of the Pioneer Company without cost.  In November, 1918, the Advance Company had a large stock of lumber, poles, tiling, ties, etc., in the yard which had not been creosoted.  A short time prior to November, 1918, the Advance Company was advised by the Pioneer Company1925 BTA LEXIS 2027">*2029  that the arrangement would be discontinued and, also, that its majority stockholders would place their stock upon the market.  Thereupon, the Advance Company, in order to prevent a possible loss and considerable expense through the moving of its material and the making of other arrangements for having its timber creosoted, began negotiations for the purchase of a majority of the stock of the Pioneer Company, with the result that 197 shares were purchased for $17,400, thereby enabling it to continue the arrangement as theretofore.  During 1914 the stock of the Pioneer Company sold for $50 a share.  In 1917, 50 shares were sold for $20 a share.  In that year the taxpayers were offered 75 shares at $20 a share, par value $100, but did not purchase them.  The balance sheets of the Pioneer Company at December 31, 1917, and at December 31, 1918, were as follows: Assets:19171918Merchandise on hand$6,197.56$8,287.06Accounts receivable1,036.463,079.77Bills receivable2,300.00Machinery25,037.7422,557.44Livestock and equipment175.00244.00Office fixtures and supplies479.00431.10Liberty bonds300.00Cash in bank127.75630.43Cash in hand15.00Deficit11,413.02Loss and gain7,100.0044,466.5344,945.20Liabilities:Capital stock25,400.0030,000.00Accounts payable744.88445.20Bills payable -Bank of Ensley16,500.0014,500.00Bank of Alabama1,500.00Interest due January 1321.6544,466.5344,945.201925 BTA LEXIS 2027">*2030 3 B.T.A. 146">*148  The balance sheet at December 31, 1919, was as follows: Assets:Accounts receivable$9,915.17Bills receivable2,300.00Merchandise7,197.61Livestock and equipment200.00Machinery20,620.15Liberty bonds500.00Office fixtures400.00Cash in bank21.66Deficit4,581.7945,736.38Liabilities:Accounts payable100.00Bills payable13,000.00Capital stock30,000.00Interest due bank238.92E. B. Teague1,000.00J. E. Chandler500.00H. C. Russell897.4645,736.38The earnings of the Pioneer Company amounted to $2,709.64 in 1917, $6,612.63 in 1918, and $2,518.61 in 1919.  On August 1, 1919, the Advance Company was dissolved and these taxpayers received one-third and two-thirds, respectively, of the assets of the company, and assumed the same proportion of its liabilities, carrying on the business thereafter as a partnership under 3 B.T.A. 146">*149  the firm name of the Advance Lumber Co.  The 197 shares of stock of the Pioneer Company were set up on the books of the partnership at a value of $15,047.66 at the date of dissolution of the Advance Company.  Each of the taxpayers reported as a profit his distributive share of1925 BTA LEXIS 2027">*2031  the assets received upon the dissolution, the only item in dispute being the value on August 1, 1919, of the 197 shares of stock, which the Commissioner valued at $17,400.  The value of the 197 shares of stock of the Pioneer Company on August 1, 1919, was $15,047.66.  The Commissioner also held that the amounts received by taxpayers upon dissolution in excess of the cost or fair market value on March 1, 1913, of their stock, which is not in dispute, was subject to both normal and surtax under section 201(a)(c) of the Revenue Act of 1918.  During the years 1920 and 1921 the partnership, composed of the taxpayers, borrowed considerable sums of money from the banks.  In order to obtain these loans they took out insurance policies upon their lives, placing them with the banks as security.  The partnership paid the premiums on said policies and deducted, as an expense in the years 1920 and 1921, the premiums so paid, amounting to $482.60 and $466.10, respectively, which deductions the Commissioner disallowed and increased the incomes of the taxpayers accordingly.  DECISION.  The deficiency should be computed on the basis of the value of 197 shares of the Pioneer Lumber & Creosoting1925 BTA LEXIS 2027">*2032  Co.'s stock of $15,047.66.  The determination is otherwise approved.  . Final determination will be settled on 15 days' notice, under Rule 50.  