Jemison v. Commissioner

EUGENIA R. JEMISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JEMISON & COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jemison v. Commissioner Docket Nos. 64996, 64997. United States Board of Tax Appeals 28 B.T.A. 514; 1933 BTA LEXIS 1116; June 22, 1933, Promulgated *1116 Held, where corporate stock is transferred prior to payment dates of dividends theretofore declared, such dividends are reportable as gross income of the transferee in the year they become due and payable. Held, further, in the above circumstances, the amount paid by the transferee to the transferor in consideration for accrued dividends surrendered is taxable profit to the transferor. Lee C. Bradley, Jr., Esq., for the petitioners. Thos. F. Callahan, Esq., for the respondent. LANSDON *514 Two appeals are consolidated in these proceedings to review tax deficiencies for the year 1929. The amount in dispute in Docket No. 64996 is $625.07 and in Docket No. 64997, the sum of $197.64. Both appellants allege in their respective petitions that the respondent erred in holding them taxable for income received in the form of dividends upon shares of stock in two corporations which figured in an exchange transaction between them. FINDINGS OF FACT. Petitioner Eugenia R. Jemison is a citizen and resident of Birmingham, Alabama, and petitioner Jemison & Co. is a corporation of the same city and state. On August 1, 1929, the first named*1117 petitioner transferred to the latter a quantity of stock of the First National Bank of Birmingham in exchange for 150 shares of 6 percent preferred stock of Redmont Land Co. and 464 shares of 7 percent preferred stock of the Tutwiler Hotel Co., a corporation. Prior to this exchange both of these corporations had legally declared dividends upon all of their preferred stock, of which, upon the shares here involved, one half still remained unpaid. On the Redmont Land Co. stock the amount still due and payable on September 8, 1929, was $450, and on the Tutwiler Hotel Co. shares, $1,624, payable January 1, 1930. The parties have stipulated that in the transactions here considered they added to the base price which the petitioner Jemison paid to Jemison & Co. for the Redmont Land Co. stock the sum of $357.48 as accrued dividends, and to the base price of Tutwiler Hotel Co. stock the sum of $270.67. *515 On or about September 8, 1929, petitioner Jemison collected the sum of $450 in dividends on the Redmont Land Co. stock, and, in December following, $1,624 as dividends from the Tutwiler Hotel Co. stock. Neither of these petitioners reported in their respective income tax*1118 returns for 1929 any income attributable to the corporate dividends hereinabove discussed; but the respondent, in his audit, added to the income of petitioner Jemison the sum of $2,074 on account of such dividends, and to the income of Jemison & Co. the sum of $628.15 as profit derived from the exchange of the securities; this latter sum being the amount added to their purchase price on account of accrued dividends. OPINION. LANSDON: The petitioner Jemison, Dockdet No. 64996, contends that no part of the amount received as dividends on the corporate stock referred to in our findings of fact constitutes taxable income in the year collected, arguing that that sum total was but the gross proceeds from the collections of accounts receivable acquired in the stock exchange transaction. In other words, it is this petitioner's claim that at the time she acquired the preferred stock of the two corporations concerned she also acquired, in addition to the bare property interest represented by each share, the right to the unpaid dividends which had been theretofore declared and which constituted debts owing to Jemison & Co. from the corporation. The petitioners' counsel has cited a number*1119 of decisions to show, in contemplation of law, who owned the property in the disputed dividends at the time they were separated from the corporation's undivided surplus by corporate act and appropriated to the stockholders' accounts. In so far as that question pertains to legal title to the dividends at the time they were declared, the petitioners' argument is sound and in line with the majority of court decisions. The controlling question here, however, is not one of ownership at a given time, but rather of taxable enjoyment in the taxpaying period as fixed by the statutes. Section 22(a) of the Revenue Act of 1928 makes corporate dividends reportable as income; and, in applying that provision to cases where stock has been sold between dividend dates, the Secretary of the Treasury has provided in article 51 of Treasury Regulations No. 74 in part as follows: In the case of stock sold between dividend dates, the entire amount of the dividend is income to the vendee and must be reported in his gross income when the dividend becomes due and payable. The amount advanced by the vendee to the vendor in contemplation of the next dividend payment is an investment of capital and may not*1120 be claimed as a deduction from gross income. *516 The facts herein bring the petitioner Jemison clearly within this provision of the regulation. The whole amount of dividends received by her was taxable income. Under the same regulation it is equally clear that the amount which she advanced to the vendor was a capital outlay and is not deductible from income. Conversely, it follows that the $628.15 was received by the petitioner Jemison & Co., in the sale of capital assets. The parties have stipulated that if it is held that this transaction was of a capital nature the entire amount is in excess of the cost of the property sold and is income to Jemison & Co. The determinations of the respondent conform to the law and regulations and are affirmed. Reviewed by the Board. Decision will be entered for the respondent. ARUNDELL and BLACK dissent.