Duke v. Commissioner

NANALINE H. DUKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Duke v. Commissioner Docket No. 17254. United States Board of Tax Appeals 18 B.T.A. 374; 1929 BTA LEXIS 2065; November 29, 1929, Promulgated *2065 1. Where, incident to the dissolution of one company, its stockholders are granted rights to purchase stock in another company created by transfers of part of first company's property, and a stockholder in the first company exercises her rights and purchases stock in the new company, the cost of the stock so acquired is the amount paid in cash, plus the value of the right. 2. Held, further, that the sale of stock acquired may give rise to a taxable gain or a deductible loss. H. H. Shelton, Esq., for the petitioner. O. J. Tall, Esq., for the respondent. VAN FOSSAN *374 This proceeding is brought to redetermine the deficiency in income and profits taxes of Nanaline H. Duke for the year 1920 in the sum of $20,248.42. The petitioner alleges two errors: (1) That the Commissioner disallowed as a credit against the petitioner's income tax the sum of $21,659.67, the amount paid by her as taxes to the British Government, and (2) that he reduced the cost of 378 shares of the common stock of P. Lorillard Co. from $180 per share to $100 per share by excluding a market value of $80 per share of the right accruing to the stockholders of the American*2066 Tobacco Co., who purchased the common stock of P. Lorillard Co. at par. FINDINGS OF FACT. The facts are stipulated and are as follows: (1) That the taxes in controversy are income and profits taxes for the calendar year 1920 and the deficiency asserted is for $20,428.42; (2) That the tax withheld by the British Government on dividends received by petitioner on stock of the British American Tobacco Co., in the sum of $21,659.67, during said year, represents tax paid to the British Government on dividends received by taxpayer from a British corporation, and may, therefore, be allowed as a credit for foreign taxes paid and the amount of $21,659.67 allowed by respondent as a deduction from gross income for the year 1920 in the deficiency letter may be restored to gross income; (3) That the United States Supreme Court, in the case of , on May 29, 1911, directed a distribution of certain assets held by the American Tobacco Co.; *375 (4) That the United States Circuit Court for the Southern District of New York, by decree of *2067 November 16, 1911 (), carried out the Supreme Court's mandate; (5) That petitioner in the year 1912 owned 378 shares of American Tobacco Co. stock, which gave her the right to subscribe for a like number of shares of P. Lorillard Co. at par, $100 per share; (6) That for the purpose of this appeal the Board may, in arriving at the cost to the petitioner of the 378 shares of P. Lorillard Co. stock, refer to the decree of the United States Circuit Court as reported in , which decree may be considered in its entirety to be a part of this stipulation; (7) That petitioner so subscribed for 378 shares of said last-mentioned stock and paid cash therefor, $37,800, in 1912; (8) That the "rights" to purchase the 378 shares of P. Lorillard Co. stock were traded in on the market on the date exercised at $80; (9) That the quotations of P. Lorillard Co. stock on March 1, 1913, were $185 bid, $191 asked, no sales (Prentice-Hall, Standard Statistics); (10) That petitioner sold said 378 shares of P. Lorillard Co. stock in the calendar year 1920, for $48,006, or $127 per share; (11) That any other issues raised in the pleadings will be abandoned; *2068 (12) That this case shall be submitted to the Board on the basis of this stipulation, it being agreed that no further evidence is to be introduced by either party, but that briefs may be filed by both parties within such time as the Board may direct. The pertinent part of the decree is as follows: These securities will be disposed of by the American Tobacco Company as follows: The common stock (of P. Lorillard Company) will be offered for cash at par to the holders of the common stock of the American Tobacco Company in proportion to their holdings, and any not purchased by the persons thus entitled thereto shall be sold to persons other than the individual defendants, to the end that such offer of common stock of the two new companies to the common stockholders of the American Tobacco Company shall not be used by the individual defendants to increase their ownership therein beyond the proportion of their holdings of the common stock of the American Tobacco Company. OPINION. VAN FOSSAN: In the stipulation of facts the respondent concedes that the sum of $21,659.67 represents the tax paid to the British Government on dividends received by the petitioner from a British*2069 corporation and is, therefore, allowable as a credit for foreign taxes paid. The sole issue remaining for our consideration, therefore, is whether or not petitioner suffered a loss by reason of the sale of 378 shares of common stock of P. Lorillard Co. in 1920. *376 The disintegration of the combination headed by the American Tobacco Co. was accomplished by a complicated program of distribution of plants and equipment, securities and other tangible and intangible assets and of the assumption of liabilities in various forms. In furtherance of the plan the decree of the Circuit Court of Appeals provided, among other things, that the common stock of P. Lorillard Co. would be sold at par for cash to the common stockholders of the American Tobacco Co. in proportion to their holdings. Pursuant to that provision the petitioner, a stockholder in the American Tobacco Co., in 1912 subscribed for and purchased 378 shares of the common stock of the P. Lorillard Co. and paid $37,800 in cash therefor. Owing to the fact that under the said decree P. Lorillard Co. was capitalized to return to its stockholders 11.02 per cent on the capital invested, based on the 1910 earnings of the*2070 American Tobacco Co., the securities became an attractive investment and the rights to purchase the stock of the new corporation were traded in on the market at $80 on the date on which petitioner purchased her 378 shares. Thus, had she chosen to sell her rights instead of exercising them, she might have received $30,280 therefor. She elected, however, to purchase the stock at par in accordance with the terms of the decree. In this situation petitioner contends that the actual cost to her of the stock so purchased was $180 per share, or the value of the right plus the cash paid for the stock. The right to purchase stock in the newly organized P. Lorillard Co. granted to shareholders in the American Tobacco Co. was in the nature of a dividend which, had it occurred in a taxable year, would have been taxable. . That these rights were valuable appears from the quoted market price of $80. Looking at the transaction broadly, the consideration paid for the stock was $100 cash plus the surrender or exercise of a right. By such surrender of one of these rights and the payment of $100 petitioner acquired property (a share of stock) *2071 worth $180 on the market. The purchase of a share of stock by one not possessing a right could have been accomplished only by paying $180 on the open market. Therefore, when petitioner exercised the right previously issued her, she merely converted property worth $80 into another form. It follows that the cost to petitioner of the stock in P. Lorillard Co. was $100 in cash plus the surrender of a right worth $80, or a total cost of $180. In the Metcalf case, supra, we observed, "the subsequent sale or other disposition of the property received by way of a dividend would give rise to gain or loss, dependent on the amount received *377 therefor." In that case, as in this, stock rights were issued to purchase stock in a separate company, not the one in which the petitioner already held stock. The Circuit Court of Appeals, in affirming the decision of the Board in the Metcalf case (), said: "No sound distinction can be drawn between a distribution of stock of another corporation and one of valuable rights to purchase such stock." We are of the opinion that upon the sale in 1920 for $127 per share of stock which cost $180 per share*2072 in 1912, and which had a market value on March 1, 1913, of $188, petitioner suffered a deductible loss of $53 per share. Decision will be entered under Rule 50.