Natural Gasoline Corp. v. Commissioner

Natural Gasoline Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent Natural Gasoline Corp. v. Commissioner Docket No. 41891 United States Tax Court 21 T.C. 439; 1953 U.S. Tax Ct. LEXIS 4; December 31, 1953, Promulgated *4 Decision will be entered for the respondent. A dividend resolution by petitioner's board of directors provided for the distribution of certain securities and did not create to that extent a monetary obligation which was satisfied by the distribution of such securities; accordingly, petitioner realized no recognizable loss on the transaction. John E. McClure, Esq., Edward L. Updike, Esq., and Charles W. Dohnalek, Esq., for the petitioner. John W. Alexander, Esq., for the respondent. Raum, Judge. RAUM *439 The Commissioner determined that there was a deficiency of $ 6,919.07 in the income tax of petitioner for the calendar year 1948. The issues are (1) whether the petitioner realized a recognizable loss on the distribution of certain shares of Warren Petroleum Corporation stock as a dividend to its stockholders, and (2) if such a loss is recognizable, whether a part of it must be disallowed under the provisions of section 24 (b) (1) (B) of the Internal Revenue Code. FINDINGS OF FACT. Some of the facts have been stipulated and are so found. The petitioner, Natural Gasoline Corporation, is a corporation organized under the laws of the State of Texas, with its*5 principal office in Tulsa, Oklahoma. The return for the taxable year here involved was filed with the collector of internal revenue for the district of Oklahoma. During 1948 the petitioner had an authorized and issued common capital stock of $ 350,000, more than 60 per cent of which was owned by the William K. Warren family. The principal business activity of the petitioner in 1948 was the manufacture and marketing of casinghead gasoline and related products. In 1947 and 1948 petitioner purchased 16,400 shares of common capital stock of Warren Petroleum Corporation, a corporation organized under the laws of the State of Delaware, and 100 shares of common stock of the Devonian Company. Petitioner paid $ 406,128.41 for the 16,500 shares of stock. In the year 1948 petitioner sold 10,700 shares of that stock (including the 100 Devonian shares) with a cost basis to the petitioner of $ 264,655.67 for $ 332,006.11, and realized short-term capital gains thereon of $ 67,350.44. The remaining 5,800 shares of common capital stock of Warren Petroleum Corporation, having a cost basis to petitioner of $ 141,472.74, were disposed of by petitioner in the following manner: *440 On December*6 22, 1948, the board of directors of the petitioner adopted and passed the following resolution: Resolved that there be paid out of the surplus or net profits of the Corporation a dividend of $ 210,000.00 on all the shares of common stock of the Corporation, said dividend to be payable immediately to holders of record of said stock at the close of business on December 21, 1948. Said dividend shall be payable pro rata in stock of Warren Petroleum Corporation to the extent of 5,800 shares of such stock of Warren Petroleum Corporation at a value of $ 21.25 per share adjusted by payment of cash to even shares, and the remainder of such dividend shall be payable in cash. The petitioner's earnings for the year 1948 were in excess of $ 210,000 and at that time it had earnings accumulated since March 1, 1913, substantially in excess of $ 210,000. During the year 1948 the terms of the above resolution were carried out by transferring the 5,800 shares of common capital stock of Warren Petroleum Corporation to the stockholders and paying the balance of $ 86,750 in cash. The fair market value of the stock on December 21 and December 22, 1948, was $ 21.25 per share. On the books of the petitioner*7 the disposition of the 5,800 shares of Warren Petroleum Corporation common capital stock was treated as a sale resulting in a short-term capital loss of $ 10,557.02 and a long-term capital loss of $ 7,665.72, computed as follows: Cost basis of 5,000 shares $ 116,807.02 Less: 5,000 shares at $ 21.25 a share 106,250.00 Short-term capital loss $ 10,557.02 Cost basis of 800 shares 24,665.72 Less: 800 shares at $ 21.25 a share 17,000.00 Long-term capital loss 7,665.72 Total capital loss $ 18,222.74 The 5,000 shares were held by the petitioner for 6 months or less. The 800 shares were held by the petitioner for more than 6 months. On its Federal income tax return for the taxable year 1948 the petitioner claimed as deductions the $ 10,557.02 as a short-term capital loss and the $ 7,665.72 as a long-term capital loss. In computing the deficiency herein, the respondent determined that the petitioner "sustained no loss on this transaction which would constitute an allowable deduction under Internal Revenue laws." OPINION. The question before us is whether the distribution by petitioner of the Warren Petroleum Corporation stock as a dividend *441 to its stockholders*8 was a transaction in which the petitioner realized a loss which is recognizable for tax purposes. The petitioner's argument is that the declaration of the dividend by the petitioner's board of directors created a monetary obligation to the stockholders which was satisfied by the distribution of the stock and a recognizable loss was suffered. The contention of the Commissioner is that it was intended at the outset that the Warren stock be distributed as a dividend and in such circumstances the distribution was not a transaction which produced tax consequences to petitioner. We agree with the Commissioner. It has been established that if a corporation declares a cash dividend and satisfies the obligation which is created by such declaration by the distribution of property, the corporation can realize a recognizable gain or loss on the distribution (Callanan Road Improvement Co., 12 B. T. A. 1109; cf. Bacon-McMillan Veneer Co., 20 B. T. A. 556), but if the declaration of the dividend is in reality a declaration of a property dividend (even though in form declared in money but payable in property) and the property is later*9 distributed, no taxable gain or loss is realized. Columbia Pacific Shipping Co., 29 B. T. A. 964, affirmed 77 F. 2d 759 (C. A. 9); General Utilities & Operating Co., 29 B. T. A. 934, reversed 74 F. 2d 972 (C. A. 4), reversed 296 U.S. 200. We must therefore consider the effect of the dividend resolution. The resolution by petitioner's board of directors was as follows: Resolved that there be paid out of the surplus or net profits of the Corporation a dividend of $ 210,000.00 on all the shares of common stock of the Corporation, said dividend to be payable immediately to holders of record of said stock at the close of business on December 21, 1948. Said dividend shall be payable pro rata in stock of Warren Petroleum Corporation to the extent of 5,800 shares of such stock of Warren Petroleum Corporation at a value of $ 21.25 per share adjusted by payment of cash to even shares, and the remainder of such dividend shall be payable in cash. We find it difficult to perceive how the above resolution, read in its entirety, could be construed as *10 obligating the corporation to distribute anything other than the 5,800 shares of stock referred to, valued at $ 21.25 per share, and the amount of cash necessary to bring the total distribution to $ 210,000. Although the stipulated fair market value of the stock on December 22, 1948, the date of the dividend resolution, was $ 21.25, the same as the valuation placed on the stock by that resolution, the value might have either increased or decreased on the date of distribution. Even in such circumstances the stock was to be distributed at a valuation of $ 21.25 per share and the cash distribution would therefore remain the same. Petitioner's argument then that a definite obligation of $ 210,000 was created seems unrealistic when it is considered that because of fluctuations in the fair market value of *442 the stock its stockholders might have received either more or less than $ 210,000. It is clear, we think, that the distribution of the stock as a dividend was intended at the outset 1 and therefore no loss can be recognized. *11 This controversy is ruled by the General Utilities case, where the decision of the Board of Tax Appeals on this issue was approved by both the Court of Appeals and the Supreme Court. There, too, a resolution provided for a dividend in a specified amount and then provided further that it was payable in certain stock valued at a fixed amount per share: "that a dividend in the amount of $ 1,071,426.25 be and it is hereby declared * * * payable in Common Stock of The Islands Edison Company at a valuation of $ 56.12 1/2 a share * * *." 29 B. T. A. at 936. It was urged in that case, as here, that an obligation in a fixed amount was created and that gain or loss could be recognized when such obligation was discharged by distribution of the stock. But that contention was rejected in the General Utilities case. It was held that the resolution must be read as a whole and that the words which followed, providing for the distribution of the stock at a fixed valuation, must be read as a gloss on what preceded. And by the way of emphasis, it was pointed out that there was not even a punctuation mark before the words that followed. 29 B. T. A. at 939, 940.*12 Petitioner herein seizes upon the latter remark and contends, in substance, that its case is different because there is a period between the gross dollar measure of the dividend and the provision for payment in stock valued at a fixed amount. We think that the cases are indistinguishable. The reference to the absence of punctuation in the General Utilities case was merely by the way of emphasis. The result is the same whether the two thoughts are in separate clauses following one another without punctuation, or whether they are in consecutive sentences separated by a period, or whether they appear in any other form, provided that they are component parts of a single plan spelled out in the resolution. Cf. Corporate Investment Co., 40 B. T. A. 1156, 1165, 1168; Columbia Pacific Shipping Co., supra.We are convinced that here, as in the General Utilities, Corporate Investment, and Columbia Pacific cases, the provision describing the dividend in terms of dollars cannot be read in isolation and must be considered together with the companion provision for payment in stock. Since the above issue is resolved in*13 favor of respondent, it is unnecessary to pass upon his alternative contention that part of the loss *443 must in any event be disallowed under the provisions of section 24 (b) (1) (B) of the Internal Revenue Code, although it is difficult to see from the stipulated facts why section 24 (b) (1) (B) is inapplicable if this issue is to be considered. Other adjustments made by the respondent were not contested. Decision will be entered for the respondent. Footnotes 1. The petitioner introduced evidence to show that a cash dividend was intended at the outset and the stockholders later consented to having the distribution made partly in the stock. Apart from the fact that the testimony offered was that of a witness who was not then a member of the board of directors and was not shown to have been present at the board meeting at which the dividend was declared, we cannot allow such evidence to contradict the clear language of the resolution.↩