Burrus Mills, Inc. v. Commissioner

Burrus Mills, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent Burrus Mills, Inc. v. Commissioner Docket No. 35296 United States Tax Court 22 T.C. 881; 1954 U.S. Tax Ct. LEXIS 143; July 14, 1954, Filed July 14, 1954, Filed *143 Decision will be entered under Rule 50. Income -- Corporation Dealing in Its Own Shares. -- A corporation sold shares of its own stock, which it had acquired from former stockholders as part consideration in sale of a flour mill and which were held in its treasury, to corporate employees under an employee stock purchase plan. Held, the corporation realized taxable gain under Regulations 111, section 29.22(a)-15. Commissioner v. Batten, Barton, Durstine & Osborn, Inc., 171 F. 2d 474, reversing 9 T. C. 448; Commissioner v. Rollins Burdick Hunter Co., 174 F. 2d 698, reversing 9 T. C. 169; Commissioner v. H. W. Porter & Co., 187 F. 2d 939, reversing 14 T. C. 307, followed. Iverson Walker, Esq., and Edward L. Wilson, Esq., for the petitioner. John W. Alexander, Esq., for the respondent. Tietjens, Judge. Van Fossan, Murdock, Turner, Johnson, and Withey, JJ., dissent. TIETJENS *881 The Commissioner determined a deficiency in income tax for the fiscal year ended May 31, 1947, in the amount of $ 30,650. Several adjustments have been agreed upon and can be reflected in a Rule 50 computation. The only remaining issue is whether petitioner realized taxable gain from the sale of 15,143 shares of its treasury stock. FINDINGS OF FACT. The stipulated facts are so found and the stipulation incorporated herein by reference. Petitioner is a Delaware corporation with its principal office at Dallas, Texas. It filed its return for the fiscal year ended May 31, 1947, with the collector of internal revenue for the second district of Texas. Prior to August 1, 1951, petitioner was known as Tex-O-Kan Flour Mills Company. On that date, its name was changed to Burrus Mills, Incorporated. At incorporation petitioner's authorized capital consisted of 40,000 shares of 7 per*145 cent preferred stock of the par value of $ 100 each, and 500,000 shares of no-par common stock. By charter amendment in 1946, 50,000 shares of 4 1/2 per cent preferred stock were authorized and issued in lieu of the original 7 per cent preferred and an additional 250,000 shares of common were authorized. For many years petitioner has been engaged through various operating divisions in the business of milling flour, operating terminal elevators, and merchandising grain and mixed feeds. *882 At the beginning of petitioner's fiscal year ended May 31, 1947, petitioner held 15,143 of its issued common shares in its treasury. These shares had been acquired in four blocks as follows: (1) 14,151 Shares From Fant Interests. At the organization of petitioner in 1929 it acquired all of the net assets of the corporation known as Fant Milling Company which owned and operated a flour milling plant at Sherman, Texas, by issuance of petitioner's preferred and common stock to the stockholders of Fant Milling Company. Petitioner operated the Fant mill under a lease agreement with a subsidiary corporation until 1937 when the subsidiary was dissolved and the Fant mill became an operating*146 division of the petitioner. During the entire period of ownership of the Fant mill by petitioner local management was in the hands of stockholders of petitioner, who had been the principal stockholders of Fant Milling Company prior to 1929. Petitioner on May 31, 1938, transferred the Fant mill to the local management in consideration of $ 94,007.90 cash, $ 20,000 in promissory notes and the surrender to petitioner of 2,420 shares of its preferred stock and 14,151 shares of its common stock. The parties to this transaction expressly agreed that the purchase price of the Fant mill was $ 476,475.73, the value of the net assets thereof as shown on petitioner's books, and valued petitioner's preferred stock at par of $ 100 per share and petitioner's common stock at the current book value of $ 8.513 per share. (2) 60 Shares From J. C. Mitchell. At or about the time of organization of petitioner in 1929, J. C. Mitchell, then an employee and now executive vice president of petitioner, purchased 60 shares of petitioner's common stock, financing this purchase by giving his promissory note payable to petitioner. On April 9, 1932, when Mitchell left the employment of petitioner for an*147 interim period of 2 years, he turned in these 60 shares to petitioner for the outstanding balance of $ 500 due on his note. (3) 732 Shares From Mrs. Glenn E. Miller. On July 21, 1939, petitioner acquired from Mrs. Glenn E. Miller 732 shares of its own authorized and outstanding common stock in complete discharge of the unpaid balance on a past due promissory note payable by Mrs. Miller's deceased husband, Howard Miller, to petitioner in the amount of $ 5,000. The deceased Howard Miller acquired these 732 shares on original issuance to him by petitioner in 1929 at a time when he was a salesman for petitioner. Miller died in 1932 and said shares were transferred to the name of "Mrs. Glenn E. Miller, Independent Executrix of the Estate of Howard Miller," who held them until they were surrendered to petitioner in the 1939 transaction. (4) 200 Shares From C. H. Vandenburgh. In 1935 C. H. Vandenburgh, then an employee of petitioner, purchased 200 shares of petitioner's *883 common stock from W. Lee O'Daniel, financing this purchase by giving his promissory note payable to petitioner. On July 21, 1939, some 3 years after Vandenburgh had left the employment of petitioner, *148 he transferred the aforesaid 200 shares to petitioner in complete discharge of the unpaid balance on his note to petitioner then past due in the amount of $ 950.68. Petitioner acquired these 200 shares in lieu of foreclosure on the note. Petitioner was not obligated to acquire any of the shares described in the foregoing transactions and had no plan for reacquiring its common stock during the years covered by the transactions. Neither did the petitioner have any intention of disposing of any of the 15,143 shares at the time they were acquired. These were the only shares of petitioner's common stock reacquired by petitioner prior to May 31, 1946. The shares were not retired. They were recorded in petitioner's ledger from date of acquisition until disposition in an account designated "Treasury Stock" until May 31, 1946, and redesignated "Treasury Stock -- Common" on that date. In each of petitioner's annual statements for its fiscal years 1938 through 1946, the reacquired shares of its common stock on hand at the particular balance sheet date were shown in the "Net Worth" or "Capital Stock and Surplus" section of the balance sheet as a deduction from issued and outstanding common*149 stock designated "Treasury Stock" or shares "in treasury." None of these shares was voted nor were any dividends paid thereon while held by petitioner. At a meeting of petitioner's board of directors on April 3, 1947, an employee stock purchase plan was approved. This was the first such plan conducted by petitioner. Pursuant to the plan employees and officers of the corporation would be financed in purchasing stock of the petitioner at $ 11.50 per share. The officers and employees participating in the plan were to execute loan agreements providing that on their severance from petitioner, petitioner should have an option to repurchase stock "at the book value at that time, minus that amount by which $ 11.50 per share was less than the book value of the stock on May 31, 1947." After April 3, 1947, and prior to the close of petitioner's fiscal year ended May 31, 1947, petitioner sold all of the 15,143 shares of its common stock held in its treasury and described above for a total price of $ 174,144.50, out of which it paid $ 1,715.44 for stock transfer taxes. All of these shares were sold pursuant to the employee stock purchase plan. During the same fiscal year petitioner sold an*150 additional 9,536 shares of its common stock pursuant to the plan. These shares were part of 18,536 shares which petitioner purchased from brokers and other individuals during the same fiscal year in order to meet the demand *884 for shares under the plan. These purchases were recorded on petitioner's books in a special ledger account designated "Employees Stock Pool Account" separately from the 15,143 shares which had been held and recorded in its "Treasury Stock" and "Treasury Stock -- Common" accounts for several years. Petitioner accounted for the net excess of sales price over cost assigned on its books to the shares of its common stock sold during its fiscal year ended May 31, 1947, by a credit to its "Capital Surplus" account. As a result of this same journal entry, petitioner's account designated "Treasury Stock -- Common" was closed. During the period from January 1931 until its fiscal year ended May 31, 1947, petitioner did not sell any of its own stock and none of its own stock was sold during the fiscal year ended May 31, 1947, except pursuant to the employee stock purchase plan. At May 31, 1947, petitioner had on hand 9,000 shares of its common stock, all of which*151 had been acquired during the month of May 1947, and which were being carried in petitioner's aforementioned "Employee Stock Pool Account." OPINION. The parties are agreed that gain was realized on the sale of the treasury shares here involved and the amount thereof. The only question is whether the gain was taxable under Regulations 111, section 29.22 (a)-15. 1 *152 Petitioner acquired the shares in question in the 1930's in transactions which amounted to purchases and sales, albeit the bulk of the shares was transferred to petitioner in partial consideration for the sale of corporate property. ; . The shares were not canceled or retired, but were held in the corporate treasury until their sale at a profit in the fiscal year ended May 31, 1947. We do not think this was a "capital transaction." Neither the fact that the sales were made *885 pursuant to an employee stock purchase plan nor the fact that the purchasing employees were bound to grant petitioner an option to repurchase upon termination of employment is controlling. We have examined all the "facts and circumstances" to determine "the real nature of the transaction" before us, and, as we view it, the factual situation differs in no significant respect from those with which this Court was concerned in , revd. *153 (C. A. 2) ; , revd. (C. A. 7) ; , revd. (C. A. 3) ; and . In the latter case we refused to follow the reversals in the Courts of Appeals. Our decisions in those cases were to the effect that no taxable gain was realized by petitioners since they were not dealing in their own shares as they "might in the shares of another corporation." The reversals followed. As recently pointed out by the Court of Appeals for the Sixth Circuit in , reversing a Memorandum Opinion of this Court, on a similar issue, the differences between the Courts of Appeals and this Court stem from differing constructions placed on Regulations 111, section 29.22(a)-15. This conflict was analyzed at length by the Court of Appeals in the Landers case and need not be repeated here. We decide the issue*154 for respondent following the Courts of Appeals decisions cited above. Decision will be entered under Rule 50. Footnotes 1. Regulations 111, section 29.22(a)-15, provides: Acquisition or Disposition by a Corporation of Its Own Capital Stock. -- Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩