Woodward v. Commissioner

GEORGE WOODWARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Woodward v. Commissioner Docket No. 42279. United States Board of Tax Appeals 23 B.T.A. 1259; 1931 BTA LEXIS 1739; July 28, 1931, Promulgated *1739 Where, upon reorganization, merger and consolidation of one corporation with another, a stockholder in the absorbed corporation receives one-half share of stock and $45 in cash for each share of stock held in the absorbed corporation, such cash payment being substantially equal to the stockholder's pro rata share in the surplus of said corporation, the cash payment has the effect of a distribution of a taxable dividend under section 203(d)(2) of the Revenue Act of 1926. Such a payment is not taxable as a capital gain. A. E. James, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. VAN FOSSAN *1260 This proceeding is for the redetermination of a deficiency in income tax for the year 1926 amounting to $1,236.20. The issue is whether the gain arising from a certain transaction involving the exchange of corporate stock owned by the petitioner for cash and other corporate stock is taxable under the capital gain provisions of the statute or is subject only to surtax. The facts essential to the issue, as alleged in the petition, were admitted by the amended answer filed by respondent. FINDINGS OF FACT. On or about the 1st*1740 of January, 1926, the petitioner was the owner and holder of 250 shares of the capital stock of the Third National Bank, a banking institution organized under the National Banking Act and carrying on and doing business in the city of Philadelphia, Pa. Thereafter, and during the said year 1926, a reorganization, merger and consolidation of the said bank with the Corn Exchange National Bank, also a banking institution, organized and doing business under the National Banking Act, was agreed upon and carried into effect. In pursuance of the said plan of reorganization, merger and consolidation, petitioner received, in the said year 1926, for each share of the capital stock of the Third National Bank, then owned by him, one-half share of the stock of the Corn Exchange National Bank and a cash payment of $45 per share for the stock so held in the Third National Bank. Petitioner, accordingly, received from the said transaction 125 shares of the capital stock of the Corn Exchange National Bank and cash in the sum of $11,250. Of the said 250 shares of the stock of the Third National Bank owned by petitioner as aforesaid, 150 shares were acquired by him by gift from his wife on May 25, 1917, and*1741 100 shares were acquired by him by purchase for $200 per share on November 20, 1919. The fair market value of the 150 shares so received by gift on May 25, 1917, was $250 per share. The said 125 shares of the Corn Exchange Bank received by petitioner as above set forth were of the market value, when received in 1926, of $80,187.50. The surplus and undivided profits of the said Third National Bank on the date of the said reorganization, merger and consolidation was $1,499.004. The surplus and undivided profits of the said Third National Bank on March 1, 1913, was $1,015,501, and the *1261 difference between the said two amounts represented and represents profits earned from March 1, 1913, to the said date of reorganization, merger and consolidation, not distributed or otherwise disposed of and added to surplus and undivided profits during the said period. The capital stock of the said Third National Bank on March 1, 1913, consisted of 6,000 shares of a par value of $600,000, and on the date when the said reorganization, merger and consolidation was carried into effect the capital stock of the said bank consisted of 10,000 shares of a par value of $1,000,000. No stock*1742 dividends were declared by the said bank between the said March 1, 1913, and the said date of reorganization, merger and consolidation, but the said increase of outstanding capital stock resulted entirely from the sale of additional shares of the said bank to its stockholders or the public, entered into and made between the said dates. Petitioner kept his accounts and made his income-tax returns during the year 1926 on the basis of receipts and disbursements. In the original income-tax return filed by petitioner for the year 1926, petitioner included nothing on account of the transaction as hereinabove set forth. In the audit of this return the respondent added to the income on account of the said transaction the sum of $11,250, and computed tax thereon at 12 1/2 per cent as arising from a transaction involving capital gain. As a result of this computation and other adjustments, the deficiency herein was determined. OPINION. VAN FOSSAN: There is no disagreement between the parties concerning the facts. The only issue is whether the taxable gain resulting from the transaction set forth in the findings of fact is taxable as a capital gain or as a dividend. The statutory*1743 provisions applicable to the issue are section 203(b)(2), (d)(1) and (d)(2) of the Revenue Act of 1926, which read as follows: (b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. (d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. *1262 (d) (2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) *1744 as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property. The petitioner received stock of the Corn Exchange Bank of Philadelphia in exchange for his Third National Bank stock, and also received $11,250 in cash. Admittedly the cash received, namely, $11,250, constituted the petitioner's taxable gain. At the date of the reorganization, consolidation and merger, set forth in the findings of fact, the Third National Bank had a surplus earned after March 1, 1913, amounting to $48.35 for each share of its capital stock. In pursuance of the plan of reorganization and merger all of this surplus, together with all the other assets of the Third National Bank, was transferred to the Corn Exchange Bank. Practically simultaneously with this transfer the Corn Exchange Bank made the exchange of stock referred to and paid to the petitioner $45 on account of each share of Third National Bank stock owned by him at the date of the exchange. This payment was only a small amount less than the*1745 per-share surplus earned by the Third National Bank between March 1, 1913, and the date of the reorganization and merger. The $45 per share was not a dividend technically because the payment was not made by the Third National Bank. But it is evident from the facts that the distribution of the $45 per share among the stockholders of the Third National Bank under the plan of reorganization was intended to be, and was in fact, a distribution among them of the major portion of that bank's surplus, earned between March 1, 1913, and the date of the merger. In our opinion the provisions of section 203(d)(2) are not concerned with the merchanism of the distribution made in pursuance of a plan of reorganization or with the agency through which the distribution was effected. The question to be answered under section 203(d)(2) is whether or not, in practical result, the distribution made in pursuance of the plan of reorganization "has the effect of a distribution of a taxable dividend." On the facts of this proceeding we are of the opinion that the payment of $45 on account of each of the petitioner's shares of the capital stock of the Third National Bank was, in effect, the distribution*1746 of a taxable dividend. Therefore, under the provisions of section 203(d)(2), the taxable gain, namely $11,250, is taxable to the petitioner as a dividend. It is not taxable as a capital gain. Judgment will be entered under Rule 50.