Opinion
Docket No. 7298.
1947-07-28
JANE EASTON BRADLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE RESPONDENT.
Granville S. Borden, Esq., and Adolph C. Meyer, C.P.A., for the petitioner. T. M. Mather, Esq., for the respondent.
During 1947 a corporation of which taxpayer was a stockholder paid dividends in cash and stock of another corporation, which stock had a value on the dates of distribution in excess of its cost to the distributing corporation. The Commissioner, in determining the portion of the distribution taxable as dividends to taxpayer, considered the appreciation in value over cost as earnings available for dividends. Held, the increase in value over cost of the distributed stock did not constitute earnings and profits to the distributing corporation and hence to the extent of such increase was not taxable to taxpayer as dividends. Granville S. Borden, Esq., and Adolph C. Meyer, C.P.A., for the petitioner. T. M. Mather, Esq., for the respondent.
The Commissioner determined a deficiency of $188.03 in petitioner's income tax liability for the year 1941. The petitioner claims an overpayment of $88.28 for that year.
The petitioner assails as erroneous the inclusion in earned surplus of Bradley Mining Co., of which she is a stockholder, of the unrealized appreciation over cost of shares of another corporation which Bradley Mining Co. acquired prior to 1941 and distributed in kind to its stockholders in 1941. The facts were stipulated.
FINDINGS OF FACT.
The petitioner is an individual, residing in Burlingame, California, and filed her return for the taxable year with the collector of internal revenue for the first district of California.
During the year 1941 the petitioner was the owner of 4,209 shares of stock of the Bradley Mining Co., hereinafter called Mining, and as such, received several distributions during the year in cash and stock of Bunker Hill & Sullivan Mining & Concentrating Co., hereinafter called Bunker Hill.
The following is an excerpt from the minutes of a special meeting of the board of directors of Mining held on September 12, 1941:
Director Mary Bradley thereupon moved that a dividend, No. 42, of 17,200 shares of the capital stock of the Bunker Hill and Sullivan Mining & Concentrating Co. held by Bradley Mining Company, be hereby declared payable September 15, 1941, the distribution to be proportionate to the interests of the various stockholders. This motion was seconded by Director James Bradley and, upon being put to a vote, was unanimously carried.
Pursuant to this resolution Mining, on September 15, 1941, distributed 17,200 shares of the capital stock of Bunker Hill then held by Mining to its stockholders in proportion to their respective interests.
As owner of 4,209 shares of Mining stock, the petitioner received 105 shares of Bunker Hill on September 15, 1941, as her proportionate share of this distribution.
The following is an excerpt from the minutes of a special meeting of the board of directors of Mining held on December 26, 1941:
Director John D. Bradley thereupon moved that a dividend, No. 44, of 17,200 shares of the capital stock of the Bunker Hill and Sullivan Mining & Concentrating Co. held by Bradley Mining Company be declared payable December 29, 1941, the distribution to be proportionate to the interests of the various stockholders. This motion was seconded by Director Mary Bradley and, upon being put to a vote, was unanimously carried.
Pursuant to this resolution Mining, on December 29, 1941, distributed 17,200 shares of the capital stock of Bunker Hill then held by Mining to its stockholders in proportion to their respective interests.
As owner of 4,209 shares of Mining stock, the petitioner received 105 shares of stock of Bunker Hill on December 29, 1941, as her proportionate share of this distribution.
The 34,400 shares of Bunker Hill which were distributed by Mining to its stockholders on September 15, 1941, and December 29, 1941, had been acquired by Mining prior to the year 1941. At the time these shares were acquired Mining had earnings and profits accumulated after March 1, 1913, in amounts in excess of the cost of these shares of Bunker Hill. On the respective dates of distribution the shares had an average adjusted cost basis to Mining of $6,917 per share.
The fair market value of the stock of Bunker Hill on September 15, 1941, was $12 a share, and on December 29, 1941, $9.0625 a share.
The fair market value on September 15, 1941, of the 105 shares received by petitioner on that date was $1,260. The fair market value on December 29, 1941, of the 105 shares received by her on that date was $951.56.
During the year 1941 petitioner received distributions in cash from Mining in the amount of $627.34.
The total value of the distributions received by petitioner in 1941 in cash and shares of Bunker Hill was $2,838.90.
The Commissioner determined that the taxable amount of the distributions was $856.78 and accordingly increased petioner's taxable income by $385.46, the petitioner having reported in her return for 1941 the amount of $471.32. In determining the amount to be taxable as dividends, the Commissioner considered as earnings available for dividends of Mining as of the dates of distribution the difference between the fair market value of the stock of Bunker Hill distributed to its stockholders as of the date of distribution and the adjusted cost basis of the same stock as of the date of distribution.
We find from the record that Mining did not have earnings and profits at the dates of distribution, inclusive or exclusive of the appreciation in value of the shares of Bunker Hill distributed, to cover the distributions made in 1941, either to the extent of the fair market value of the Bunker Hill shares or to the extent of the adjusted cost basis of such shares to Mining, and that Mining had earnings and profits, inclusive of the appreciation of the Bunker Hill shares distributed, to cover the distribution in stock and cash to petitioner in 1941 to the extent of only $856.78.
It is agreed that if the Commissioner's determination is correct there is a deficiency of $188.03, and that if his determination is incorrect there is an overpayment of $88.28. A claim for refund of this amount was filed on January 15, 1945.
OPINION
VAN FOSSAN, Judge:
The petitioner contends that when a corporation distributes property (no amount of money equivalent being stated) to its stockholders at a time when the value of the property distributed is higher than its cost to the distributing corporation, the earnings and profits of the distributing corporation should not be increased by the difference between the value and cost of the property distributed in determining the earnings and profits available for distribution and in determining the portion of the value of the distribution taxable to the stockholders as dividends under section 115 of the Internal Revenue Code,
SEC. 115. DISTRIBUTION BY CORPORATIONS.(a) DEFINITION OF DIVIDEND.— The term ‘dividend‘ when used in this chapter (except in section 203(a)(3) and section 207(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was in other property, made by a corporation which, under the law applicable to the taxable year in which the distribution is made, is a personal holding company, or which, for the taxable year in respect of which the distribution is made under section 504(c) or section 506 or a corresponding provision of a prior income tax law, is a personal holding company under the law applicable to such taxable year.(d) OTHER DISTRIBUTIONS FROM CAPITAL.— If any distribution made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not a dividend, then the amount of such distribution shall be applied against and reduce the adjusted basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. This subsection shall not apply to a distribution in partial or complete liquidation or to a distribution which, under subsection (f)(1), is not treated as a dividend, whether or not otherwise a dividend.(j) VALUATION OF DIVIDEND.— If the whole or any part of a dividend is paid to a shareholder in any medium other than money the property received other than money shall be included in gross income at its fair market value at the time as of which it becomes income to the shareholder.
The petitioner relies upon Estate of H. H. Timken, 47 B.T.A. 494; affd., 141 Fed.(2d) 625; National Carbon Co., 2 T.C. 57 (appeal of Commissioner dismissed on stipulation, C.C.A., 2d Cir., Dec. 7, 1944); and many memorandum opinions of this Court, including Howard C. Platt Trust, June 25, 1945 (appeal of Commissioner dismissed upon stipulation, C.C.A., 9th Cir., 154 Fed.(2d) 1016); Henry S. McKee, July 15, 1944 (appeal of Commissioner dismissed upon stipulation C.C.A., 9th Cir., 150 Fed.(2d) 404); Carl A. Fisher, Apr. 26, 1944 (appeal of Commissioner dismissed upon stipulation C.C.A., 10th Cir., 150 Fed.(2d) 1019); Estate of Chester A. Congdon, June 1, 1944 (appeal of Commissioner dismissed C.C.A., 8th Cir., 150 Fed.(2d) 1021); and Estate of John H. Acheson, Nov. 25, 1944 (appeal of Commissioner dismissed and case remanded upon stipulation of parties Feb. 1, 1946, C.C.A., 2d Cir.).
In the Howard C. Platt Trust case, this Court stated:
The precise point here presented was decided adversely to the respondent in Commissioner v. Estate of Timken, et al., 141 Fed.(2d) 625, affirming 47 B.T.A. 494. * * * The respondent contended, as he does here, that the increase in value of the stock distributed constituted taxable income to the stockholders of the distributing corporation. The Court of Appeals, in its opinion, answered this contention as follows:
* * * But the difficulty with the proposition is, that a mere advance in the value of the property is not income. It is nothing more than an unrealized increase in value. * * *
In the Estate of John H. Acheson case, this Court stated:
We are still of the view (especially since the retroactive amendment of the second Revenue Act of 1940) that the statute does not permit the increment in the value of the purchased shares to be regarded per se as within the corporation's earnings and profits, and that a distribution of such shares in kind (no amount of money equivalent being stated) constitutes a dividend of only the amount of the accumulated earnings and profits on hand at the date of distribution (excluding increment in value). To the extent of the value in excess of such accumulated earnings and profits, the Commissioner in all the dockets was in error in including the distribution in the taxpayers' dividends.
See also First State Bank of Stratford, 8 T.C. 831, and Committee on Finance Report No. 2114, 76th Cong., 3d sess., p. 25, discussing section 501, Earnings and Profits of Corporations, Second Revenue Act of 1940.
The respondent emphasizes, and in support of his position leans heavily upon, the fact that at the time of the acquisition of the Bunker Hill stock the distributing corporation had earnings and profits accumulated after March 1, 1913, in amounts in excess of its cost of such shares. That fact is immaterial and not determinative. Earnings and profits available for dividends do not consist of particular and specific assets. The assets of a corporation, whether cash or property other than cash, are not classified as either capital or earnings and profits. Even if the shares had been acquired out of earnings and profits, the distribution of shares would not ipso facto be a dividend within the meaning of section 115(a) unless the distributing corporation had ‘(1) earnings or profits accumulated after February 28, 1913, or (2) * * * earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made‘ out of which to make or against which to charge the distribution made. As stated in R. D. Merrill Co., 4 T.C. 955, 963, ‘A corporation can make no distribution of dividends without something to distribute, and any distribution of more than the residue left in earnings and profits must, necessarily and mathematically, be from either capital or paid-in surplus.‘ Assuming that at the time the distributions were made the corporation had a deficit or no earnings available for the distribution of dividends, it could not be successfully maintained that the shares nevertheless were a distribution of dividends because at the time of their acquisition the distributing corporation had earnings and profits.
That the fact that Bunker Hill stock was acquired at a time when the distributing corporation had earnings and profits available for dividends is not determinative is shown by the action of the respondent herein. The distribution of $2,838.90 received by the petitioner consisted of $627.34 cash and the Bunker Hill stock of the value of $2,211.56. Yet notwithstanding that the distributing corporation, at the time of its acquisition of Bunker Hill stock, had earnings and profits accumulated after March 1, 1913, in amounts in excess of its cost of such shares, respondent determined that the cash and stock distributions represented dividends to the extent of only $856.78.
The respondent relies upon Binzel v. Commissioner, 75 Fed.(2d) 989; certiorari denied, 296 U.S. 579; and Commissioner v. Wakefield, 139 Fed. (2d) 280. These cases are distinguishable. In the Binzel case the decision of the court apparently rested mainly on the failure of the taxpayer to prove that the earnings and profits of the distributing corporation were not sufficient to cover the value of the stock at the time of distribution. In the Wakefield case the court based its opinion primarily on section 115(j), for it stated that this section in express terms required that the decision of the Tax Court be reversed. Moreover, since its decision in that case the Circuit Court of Appeals for the Sixth Circuit has affirmed the decision of this Court in the Timken case, supra.
We have found that Mining did not have earnings and profits, with or without resorting to the appreciation in value of the 34,400 shares of Bunker Hill distributed to its shareholders, to cover the distributions made by it in 1941, either at the fair market value at the dates of distribution or at adjusted cost to mining. The petitioner, in 1941, received 105 shares of Bunker Hill of the fair market value as of September 15, 1941, of $1,260; 105 shares of Bunker Hill of the fair market value as of December 29, 1941, of $951.56; and cash in the amount of $627.34, or a total of $2,838.90. The adjusted cost basis to Mining of the 210 shares of Bunker Hill received by petitioner was $1,452.57. The Commissioner, as heretofore pointed out, determined that the amount of only $856.72 of the total distributions was taxable as dividends to the petitioner. In making such determination he increased Mining's earnings and profits by including therein the appreciation in value at the dates of distribution of the Bunker Hill shares, or the difference between their fair market value at the dates of o distribution and their adjusted cost basis to Mining. This was error on his part. Estate of H. H. Timken, supra; and National Carbon Co., supra.
It was agreed by the parties that if the respondent erred in his determination of the portion of the 1941 distributions taxable as dividends to petitioner, there was an overpayment of tax for that year of $88.28.
Decision will be entered under Rule 50.