Case ID: us-ct-cl_149/html/0077-01.html
Source: Caselaw Access Project
Author: {"author": "MaddeN, Judge, JoNes, Chief Judge,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

HERCULES POWDER COMPANY v. THE UNITED STATES
    [Nos. 135-57, 152-58 and 318-58.
    Decided February 3, 1960]
    
      
      Mr. David W. Richmond for the plaintiff. Mr. Robert N. Miller and Mr. Frederick 0. Graves were on the briefs.
    
      Mr. Garry A. Pearson, with whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Messrs. James P. Garland and Lyle M. Turner were on the briefs.
   MaddeN, Judge,

delivered the opinion of the court:

The plaintiff seeks to recover income taxes paid for the years 1948 through 1952. It paid the taxes as capital gains taxes upon the sale of shares of its own stock. It later concluded that the transactions were not taxable, and filed timely «laims for refunds, which claims were denied.

The plaintiff is a Delaware corporation, whose stock is listed on the New York Stock Exchange. As of December 31, 1929, its capital structure consisted of 200,000 shares of preferred stock and 1,600,000 shares of no par value common stock. Only 114,241 shares of preferred and 598,000 shares of common stock were issued and outstanding.

On January 2, 1930, the plaintiff began purchasing shares of its own common stock, and continued to do so until September 21, 1932. The purchases were in lots ranging from 1 share to 1,600 shares, and amounted to 34,886 shares in all. The average price paid was $9.10 a share and the lowest price paid was in 1932 and was $3.47. Some 12,000 of the shares were purchased from the plaintiff’s employees who had subscribed for the shares before the depression at $15 a share and did not wish to complete their purchases. The rest were bought through brokers on the open market.

During 1931 the plaintiff used 10,000 shares of the purchased stock, which we will call treasury stock, to buy the Paper Makers Chemical Corporation. During 1930, 1931, and 1932 the plaintiff sold 1,331 shares on the open market. In 1934, 800 shares were used to purchase the business of Universal By-Products Company. In 1937, and again in 1946, two for one split-ups were made in the plaintiff’s stock. The figures used hereinafter with regard to the number of shares are adjusted to make them represent original shares. Between 1933 and 1937 the plaintiff used 3,276 shares to pay bonuses to its employees.

After 1937 the plaintiff did not sell nor otherwise dispose of any of the remaining 19,479 shares, until 1948. On December 9,1948, the plaintiff’s board of directors voted a year end “B” bonus of $2,233,133 to certain of its employees who had been recommended by their superiors. Of the bonus, $1,750,038 was to be paid in cash, and the balance in treasury common stock at its then market value. The plaintiff’s “B” bonus was a profit sharing device. Only once between 1930 and 1948, viz in 1937, had any part of the “B” bonus been paid in common stock.

Wien the bonus stock was distributed to the employees, an accompanying letter from the president of the plaintiff said:

_We believe the key personnel who share in the bonus will appreciate this opportunity to increase their interest m the company and to participate as stockholders as well as employees in its continued growth, and prosperity.

No restrictions were placed upon the employees as to the disposition of their bonus stock. A survey of 1,097 employees who received stock as bonuses in 1948 showed that only 49 of them had disposed of the stock during 1949.

The market value of the stock distributed as a bonus in December 1948, which was the value attributed to it in computing the amount of each employee’s bonus, was greatly in excess of what the plaintiff had paid for the stock in 1930, 1931, and 1932. It is this excess which the Government asserts, and the plaintiff denies, was taxable income. Similar bonus distributions of treasury stock were made at the ends of the four succeeding years, and those distributions present the same legal questions as the 1948 distribution.

Section 22(a) of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.), § 22(a), gives a broad definition of what is “gross income” for income tax purposes. It concludes with the words

or gains or profits and income derived from any source whatever.

That is all that the statutes have to say about our principal problem. Obviously, some elaboration by some authority was required. Treasury Regulations 111 says:

Sec. 29.22(a)-15. 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. * * * 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 Eevenue Code.

The foregoing regulation was applicable to all the years in question except 1952. Section 39.22 (a)-15 of Regulations 118, applicable to the year 1952, is identical with its predecessor.

The problem of whether a corporation makes a profit, in a real sense, or in a tax sense, by dealing in its own shares, has been thoroughly discussed in the opinion of this court in the case of Anderson, Clayton & Co. v. United States, 129 C. Cls. 295, affirmed 350 U.S. 55. This opinion will not attempt any comparable discussion. The following opinion of the accounting profession is of interest:

Apparently there is general agreement that the difference between the purchase price and the stated value of a corporation’s common stock purchased and retired should be reflected in capital surplus. Your committee believes that while the net asset value of the shares of common stock outstanding in the hands of the public may be increased or decreased by such purchase and retirement, such transactions relate to the capital of the corporation and do not give rise to corporate profits or losses. Your committee can see no essential difference between (a) the purchase and retirement of a corporation’s own common stock and the subsequent issue of common shares, and (b) the purchase and resale of its own common stock. [Restatement and Revision of Accounting Research Bulletins, American Institute of Accountants, 1953, pp. 13-14.]

The accountants, then, do not recognize the distinction made by the Treasury Regulations between the original issue of stock and the sale of treasury stock. It would, no doubt, be a crude attempt at over-simplification of an abstruse subject to suggest that when a corporation buys its own shares it is paying a debt, its obligation to the selling shareholder to pay him his proper share of dividends and the proceeds of liquidation, if that should occur. When it sells its shares it is creating a debt, the above-described obligation, to the new shareholder. Neither the payment nor the incurring of a debt results in a gain or a loss, except in unusual circumstances.

Financially, there would not seem to be one penny’s difference between the consequences to the corporation of an original issue of 1,000 shares of stock for $100,000 and the sale of 1,000 shares of treasury stock for $100,000. An observer of the market, studying the situation of the plaintiff, would know that the corporation’s shares had been diluted to the extent of 1,000 additional shares, in the one case as in the other. If the corporation bought in 1,000 of its shares, he would know that each of the remaining outstanding shares represented a larger fractional interest in the corporation’s assets and profits. It would make no difference to him, in his estimate of the financial condition of the corporation, how the corporation kept its books. He would know that each one of these transactions represented a reconstruction of the capital of the corporation, because it represented a reduction or increase in the outstanding shares. Whether these sale and purchase transactions were rare or frequent, or large or small, would not change their essential nature as capital transactions.

The distinction drawn in the regulations, then, not recognized by the professional accountants, would seem also to be regarded as immaterial by the informed investor in the corporation’s shares. But the regulations are not challenged by the plaintiff, and section 22(a) and the constitutional provision upon which it is based are couched in language broad enough to cover many kinds of transactions. It would seem, then, that the distinction made in the regulations was merely the reaction of the taxing authorities to the appearance of things, not giving perhaps undue regard to their analytical content. They looked at a corporation, real or imaginary, which was huckstering its shares in the same way that any speculator or investor would do with the shares of any corporation. It would appear to the unanalytical observer, who saw this corporation buy its shares low and sell them high that the corporation had made a profit. It looked as if it ought to be taxed, so the regulations taxed it.

The problem in a particular case would seem to be, then, how much does the activity of the corporation look like the activity of an outside investor and speculator in its stock. A slight resemblance would seem to be insufficient to justify the distinction.

In the instant case, the activities of the plaintiff in the 1930’s might well have constituted taxable transactions within a fair interpretation of the regulations. The plaintiff bought a great many shares of its stock, sold some on the market, traded many for other properties, and used some to pay bonuses to its employees. Then for eleven years after 1937 it held the remaining stock in its treasury. Those were years in which one dealing in stock would normally have done some selling or buying. Then came the tax years here in question, and the dealing by the plaintiff with its stock. Those deals were of the special nature described above, the partial payment of year end bonuses to key employees. There would have been no point whatever in buying stock of another corporation to distribute as bonuses to the plaintiff’s key employees. Giving them its own stock, and relying on their faith in the future of the company, or their inertia, to cause them to keep it, was a thoughtful and probably a wise procedure. It was not a dealing by the plaintiff in its own shares as it would have dealt in the shares of another corporation, and we conclude, did not result in a gain taxable under the regulations.

The plaintiff, in its tax returns for the years in question took deductions of the amount of the bonuses, including the market value of the stock, as compensation paid to employees. The Government, as an alternative defense, contends that if the plaintiff’s “gains” are held to be exempt from taxation, the deductions were improper. It cites section 24 of the Internal Kevenue Code of 1939, 26 U.S.C. (1952 ed.), § 24, which reads as follows:

Sec. 24. Items Not deductible.
(a) [as amended by Sec. 121 (b), Kevenue Act of 1942, c. 619, 56 Stat. 798] General Buie. — In computing net income no deduction shall in any case be allowed in respect of—
(5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this chapter, or any amount otherwise allowable under section 23(a)(2) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this chapter;
* * * * *

The plaintiff argues, and we agree, that the transactions here involved, once they are held not to be covered into tax-ability by the special provision in the regulations, must be regarded, not as producing income exempt from taxation, but as not producing income at all, exempt or otherwise. We think that the words “gives rise to neither taxable gain nor deductible loss” in the regulation concerning the original issue of shares did not create an exemption of income from taxation. That could not be accomplished by regulation. That language must mean that such an issue does not give rise to income, within the meaning of section 22.

The plaintiff is entitled to recover, with interest as provided by law, and judgments will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c).

It is so ordered.

LittletoN, Judge, and Laramore, Judge, concur.

JoNes, Chief Judge,

dissenting,

with whom Keed, Justice (Bet.), sitting by designation, joins:

The result reached by the court stems primarily from a belief that Treasury Eegulation 111, § 29.22 (a)-15, is not in accord with the economic facts of life or with the Internal Revenue Code of 1939, and consequently that a corporation does not make a gain or profit “in a real sense,” or even “in a tax sense,” when dealing with its own shares in the manner disclosed by the record in this case. Although the court has not directly invalidated the regulations, it would appear that it has accomplished the same result in its approach to the question of the plaintiff’s tax liability. We would uphold the validity of the regulations. Clayton, Anderson & Co. v. United States, 350 U.S. 55 (1955).

The Government is not seeking to convert a strictly capital transaction into an income-producing transaction. If, as the plaintiff contends, the sale of treasury stock involves merely a “contribution to the capital of the corporation,” it is difficult to understand why the Congress allowed the plaintiff corporation to deduct as a business expense the value of the treasury stock given to the employees in exchange for the alleged contribution to capital.

The majority, apparently, takes the position that a disposition of the corporation’s shares for the purpose of implementing an employee profit sharing plan can never amount to a dealing in its own shares as it would in those of another corporation even when these shares were purchased in the open market. And it has decided the case on the basis of this single circumstance instead of determining the real nature of the transaction from all of its facts and circumstances, as the regulations require.

As we view the record in this case, the employee bonus plan was not essentially or primarily a plan for employee-stockholder participation. Rather it was based on the idea that the corporation should each year pay a part of its yearly profits to those employees who contributed most to the earning of those profits. The plan provided that the bonus could be paid in stock or partially in stock. There were no restrictions on the sale of the stock which the employees received. Therefore, we would hold that in accomplishing this primary purpose of the bonus plan — the payment of an immediate reward — the plaintiff dealt with its shares as it might in the shares of another corporation.

It is true, as the court has said, that “There would have been no point whatever in buying stock of another corporation to distribute as bonuses to the plaintiff’s key employees.” This factor, however, seems irrelevant since the plaintiff could and did accomplish its purpose of rewarding its employees by making cash payments and by giving the employees stock which the corporation had purchased.

This particular stock had already been issued and 23,000 of the shares purchased were in the hands of individuals wholly outside the organization. It was purchased like any other asset. On its books it carried this stock like any other valuable asset, and in its income report for the years in question it properly treated this profit as capital gain. We cannot agree that this was an accounting error. If an individual employee or outsider had purchased this stock at the time the plaintiff purchased and had disposed of it in any fashion he would have been subject to a capital gains treatment.

Does anyone doubt that if the stock had gone down as much as it increased in value and plaintiff had used it as part payment of a bonus at the then current market value, it would have claimed a capital loss ?

If the plaintiff had sold the stock in the open market and delivered the proceeds in order to pay all the declared bonus in cash, does anyone doubt that it would have been taxable ?

The court in its opinion shows that the plaintiff used some of its stock to buy other companies. It sold 1,831 shares on the open market. When there was a split-up, the stock the company had bought participated. As we see it, this is exactly what would have happened if the Hercules Powder Company had been dealing in the stock of other corporations. Earnings, by dividends paid or by increased assets, on the treasury stock went to the company. The distribution at market value paid the company’s obligation to its employees.

To permit the plaintiff to realize gains by purchasing stock at a low price and disposing of it in lieu of cash bonuses at a higher figure, but escape all tax on the transaction, and at the same time take a deduction for salary paid to employees does not make sense. It will stand neither the light of reason nor the logic of analysis. The plaintiff’s petitions should therefore be dismissed.

Whitaker, Judge, took no part in the consideration and decision of these cases.

FINDINGS OF FACT

The court, having considered the evidence, the stipulation of the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is a Delaware corporation organized in 1912 with its principal place of business and general office in Wilmington. It engages in the business of manufacturing and selling chemicals, including explosives, naval stores (tar, pitch, turpentine, and other resinous products) and synthetic products.

2. The plaintiff’s federal corporation income tax return for the calendar year 1948 was prepared on the accrual basis and timely filed on March 14,1949, disclosing a tax liability of $6,831,433. This sum was paid in quarterly installments during 1949 of $1,707,859 on March 14, and of $1,707,858 on June 15, September 13, and December 14.

3. The gross income reported upon the plaintiff’s 1948 return included capital gains of $388,649 of which $366,158 was shown thereon to be gain from the sales of 11,369 shares of “Hercules Powder Co. Treasury Stock,” having a cost basis, including the expenses of issuance, of $116,942, for a gross sales price of $483,100.

4. On March 14, 1952, the plaintiff timely filed a formal claim for refund for the calendar year 1948, in an amount of $91,540, which states as grounds and reasons the following:

In the year 1948, the taxpayer issued shares of its Common Treasury Stock having a market value of $483,100 to its employees as additional compensation for services rendered. The cost of this stock to the taxpayer was $116,942. The excess of the market value over cost amounting to $366,158 was taxed as a capital gain at the rate of 25%.
The taxpayer contends this did not constitute trading in its own shares as it would in the shares of another corporation, and that no taxable gain resulted from this transaction.

This claim for refund was disallowed in full with statutory notice to the plaintiff in a registered letter dated April 13, 1956.

5. As of December 31, 1929, the plaintiff did not hold any of its common stock in its treasury. Its capital structure then consisted of 200,000 shares of preferred stock and 1,600,-000 shares of authorized common stock, no par value, of which 114,241 shares of preferred and 598,000 shares of common were issued and outstanding. Part of this authorized common stock has remained unissued at all times since 1929. At all times material, the plaintiff’s stock was listed on the New York Stock Exchange. Under an amendment to the plaintiff’s charter in 1929, the Board of Directors was authorized to sell up to 80,000 shares of authorized unissued no par common stock to the employees free from stockholders’ preemptive rights. In 1929, the plaintiff had instituted a subscription program for its employees, allowing them to contract in writing to purchase a specified number of shares of common stock with payments to be deducted monthly from salary (or paid in cash following retirement or by executors or administrators after death) with provision that no fractional shares would be issued, and that such contracts would be cancelled upon failure to continue agreed monthly payments for a period of four consecutive months or upon resignation or discharge from employment. The employees subscribed for 24,500 shares of the plaintiff’s common stock. These subscription agreements were suspended in 1931 and not reactivated until 1937.

6. On January 2, 1930, the plaintiff began purchasing shares of its own common stock and continued to do so during each month through September 21,1932, in lots varying from one share to 1,600 shares. It purchased 7,359 shares in 1930, 23,417 shares in 1931, and 4,380 shares in 1932, a total of 34,886 shares.

7. More than one-third of this stock, or in the neighborhood of 12,000 shares, was purchased from employees, some of whom had signed subscription agreements and chose not to continue their agreed monthly payments for financial reasons.

8. The balance of the stock, in the neighborhood of 23,000 shares, was purchased through brokers and on the open market.

9. At the time the plaintiff purchased its own shares and held them as treasury stock no adjustments were made in the “Capital Stock” account to reflect any reduction in the amount of paid-in capital, which, so far as these purchased shares were concerned, remained as shown before their purchase. In this respect the capital stock account during the years 1948-1952 continued to show the capital originally paid in for these shares.

10. At all times material, these shares were reflected on the plaintiff’s books of account in an “Investment Securities” account as “Treasury Stock.”

11. In 1931, the plaintiff exchanged 10,000 shares of such treasury stock, together with bonds and cash, for all of the capital stock of the Paper Makers Chemical Corporation.

12. In 1934, the plaintiff exchanged 800 shares of such treasury stock for the business of Universal By-Products Company.

13. Between January 2, 1930, and December 21, 1932, it also sold 1,331 shares of such treasury stock on the open market through brokers.

14. On December 21, 1932, the plaintiff held as treasury stock a total of 23,555 such shares of its own common stock and it has purchased no such shares since that date. This block of treasury stock increased in number of shares held to reflect a two for one stock split in 1937, and another two for one stock split in 1946.

15. The number of shares so held decreased as the result of distributions to employees pursuant to the plaintiff’s bonus plan during each of the years 1933 through 1937, and as the result of exchanging 800 shares for the business of Universal By-Products Company in 1934.

16. On January 1, 1948, the plaintiff held 77,916 shares of such common stock in its treasury from which it made the distributions of the 11,369 shares mentioned in finding 3 above. Increases and decreases in the number of shares held after purchases and sales ceased on December 21, 1932, were as follows:

Date Recorded, Number of Shares Balance Remaining Explanation
12/15/33 50 23,505 Class “A” Bonus
6/15/34 800 22,705 ()
2/28/35 10 22,695 Class “A” Bonus
4/30/35 100 22,595 Class “A” Bonus
1/3/36 150 22,445 Class “A” Bonus
1/20/36 90 22,355 Class “A” Bonus
11/30/37 44,710 Stock Split
12/31/37 5,752 3S,958 Class “B” Bonus
4/16/46 77,916 Stock Split
12/31/48 11,369 66,547 Class “B” Bonus

17. The Class “A” and Class “B” Bonus distributions shown under the heading “Explanation” in the tabulation above were made pursuant to a plan that was first put into effect in 1912 and which, as amended November 28,1934, was effective during the year 1948 as follows:

Resolved, that the Bonus Plan of the company heretofore existing be and the same is hereby altered, revised, and amended, to read as follows:
1. The company will grant bonuses to employees contributing in an unusual degree to the welfare of the company by their inventions, ability, industry, or loyalty. Such bonuses may consist of stock of the company and/or cash, as the Board of Directors shall from time to time determine. Awards will be made under one or both of the following classes:
2. Class “A” — BoNtjses eor INVENTIONS or other CONSPICUOUS service — to be given entirely irrespective of the company’s earnings, each case being considered on its merits without regard to position occupied or length of service of the employee; the awards to be made by the Board of Directors upon recommendations of the respective department heads, approved by the President.
Class “B” — Bonuses in the nature oe profit sharING OR EXTRA COMPENSATION TO THOSE WHO HAVE CONTRIBUTED MOST IN A GENERAL WAY TO THE COMPANY’S success — The total amount of such bonuses to be awarded shall be determined by the Board of Directors each year.
The several department heads shall prepare lists pf the employees whom they recommend for participation in such awards, classified according to the relative importance of such employees in the organization. Such lists «ball be submitted to the President for approval, and he shall, in consultation with the several department heads at interest, allocate the total bonus award amongst the employees so recommended. The list of recommended awards shall then be presented to the Board for final approval and adoption.
No award shall be made to an employee under Class “B” unless he has been in the service at least two years.
3. The Board of Directors reserves the right to modify or cancel any bonus recommendation for reasons which to it may seem sufficient.
4. Employees who are also members of the Board of Directors may be awarded bonuses under the plan; provided, however, that no such award shall be made unless the same is recommended by the President and the Chairman of the Board.
5. No contractual obligation is assumed by the company under the plan, nor can any such rights be acquired hereunder. No legal rights in, or to, or under the plan are conferred upon any employee.
6. The company reserves the right, at any time, to alter, revise, amend, or terminate the plan when in the opinion of the Board of Directors such action may appear desirable or necessary.
7. The plan as herein set forth has been adopted effective November 28, 1984, and supersedes all previous bonus plans and amendments thereto.

18. For the years 1938 through 1947 treasury stock was not paid to employees as a part of the plaintiff’s bonus plan. After that time and during the period 1948-1952, treasury stock represented approximately 25% of the bonus payments, the balance being in cash.

19. Under the plaintiff’s bonus plan, no conditions were attached to the receipt by an employee of a bonus paid in treasury stock which would preclude his selling such stock at any time. A survey made by the plaintiff among the employees who received treasury stock as a part of their Class “B” bonus award in 1948, however, disclosed that of 1,097 employees who received such stock, 1,048 still had it one year later at the end of 1949.

20. The plaintiff’s treasury stock was acquired at an average cost, adjusted for splits, of about $9.10 per share. Subsequent to 1932 each share could have been sold each year for more than its cost. Market prices based on the average of high and low adjusted for splits were as follows:

Adjusted fob Splits
Average of Year High Low High and Low
1929 _ 32.50 20.00 26.25
1930 _ 21.25 12.50 16.88
1931_ 14.50 6.50 10.50
1932 _ 7.38 3.47 5.42
1933 _ 17.16 3.75 10.45
1934_ 20.41 14.75 17.58
1935 _ 22.50 17.75 20.13
Average of Year High Low High and, Low
1936 _ 37.50 21.00 29.25
1937 _ 46.25 25.00 35.63
1938 _ 43.50 21.38 32.44
1939 _ 50.75 31.50 41.13
1940_ 50.25 34.50 42.38
1941_ 40.13 32.63 36.38
1942 _ 37.63 25.50 31.56
1943 _ 43.50 36.50 40.00
1944 _ 44.50 37.50 41.00
1945 - 57.88 41.00 49.44
1946 _ 72.25 46.50 59.38
1947 _ 63.00 50.25 56.63
1948_ 57.25 41.75 49.50
1949 _ 53.00 40.00 46.50
1950_ 69.50 49.00 59.25
1951_ 79.00 62.00 70.50
1952 _ 78.25 66.50 72.38
1953 _ 74.75 60.25 67.50

21. Prior to 1940 such treasury stock was carried as an asset on the plaintiff’s balance sheets. In 1940 and subsequent thereto, the Consolidated Balance Sheets prepared by the Public Accountants engaged to make an independent audit of the plaintiff’s accounts for purposes of the plaintiff’s published annual report carried the treasury stock under the heading “Liabilities.” The Consolidated Balance Sheet in the 1948 Annual Keport was in pertinent part, as follows:

December 31, 1948
Total Current Liabilities_$12,572,754
Total Reserves_ 10,614,503
Capital Stock and Surplus
Preferred, 5% cumulative, par value $100 (Authorized 200,000 shares) Issued 96,194 shares_$9, 619,400
Common, no par value (Authorized 3,525,000 shares of which 49,465 shares are reserved for sale to employees) Issued 2,711,336 shares_ 16,945,850
Capital surplus_ 4, 402, 582
Earned surplus_ 31,360, 771
62,328,603
Treasury stock — at cost (1948 — 8,706 shares preferred and 66,547 shares common)_ 1,476, 837
Total Capital Stock and Surplus_ 60,851, 766
Total Liabilities_$84,039,023

22. On the plaintiff’s books of account, the treasury stock was, at all times, carried in an “asset” account.

23. The closing balance sheet of the plaintiff (nonconsoli-dated) prepared by the plaintiff’s own accountants for the year 1948 and attached to its income tax return for that year was in pertinent part as follows:

Hercules Powder Company
BALANCE SHEET
Assets
December 31, 1948
Current Assets:
Cash_ _$11,187,134
U.S. Treasury Savings Notes. _ 7,016,800
Accounts Eeceivable_ $9,254,020
Less Reserves_ 936, 542 8,317, 478
Inventories:
Material, Supplies and Work in Process- 11,830,090
Finished Products_ 8,332,970
Total Current Assets_ 46, 684,472
Fixed Assets:
Plant and Property — At Cost_ 84,370,716
Reserve for Depreciation and Amortization_ 48, 533,001
Net Fixed Assets_ 35, 837, 715
Treasury Stock_ 1,476, 837
Postwar Refund of U.S. Taxes_ 160,908
Other Assets_ 269,416
Investment in Affiliated Companies_ 208, 682
Deferred Charges_ 601,086
$85,239,116

24.The plaintiff paid a total of $2,233,133 as Class “B” bonus awards in 1948, pursuant to action taken by its Board of Directors at a meeting on. December 9, 1948, the minutes of which read as follows:

Pursuant to authorization of the Board of Directors at its meeting on October 27, 1948, the President submitted detailed lists by departments of the employees recommended for participation in Class “B” bonus awards under and in conformity with the Company’s bonus plan, together with the amount of bonus recommended for allocation to each such employee; the total of these recommendations aggregating the sum of $2,-233,133 payable $1,750,038 in cash and the remainder in 11,369 shares of treasury (common) stock of this Company, having a total award value at current market price ($42.50 a share, the closing market price on Wednesday, December 8, 1948) of $483,095.
After full discussion, upon motion duly made and seconded, the following resolution was unanimously adopted:
Resolved, That the recommendations of the President presented to this meeting for Class “B” bonus awards to employees of the Company for services during the year 1948, be and the same are hereby approved and adopted, with the understanding that this approval shall include any minor changes or adjustments which may be made in such awards by the President; and be it
Further Resolved, That the Treasurer be and he is hereby authorized and directed to proceed forthwith to effectuate the transfer and delivery to the respective recipients of the common stock representing such awards and to draw the necessary checks covering payment of the cash portion of such awards.

25. Similar action was taken with respect to Class “B” bonus payments for the years 1949 through 1952.

26. The Class “B” bonus for 1948 was later accrued on the books of the plaintiff in the amount of $2,225,215.74, and except for minor items, the following credits were made:

Investment Securities_ $100, 638. 00
Salaries Aeter Deductions___ 1,408, 789. 95
Employees’ Federal Income Tax Withheld- 333,188. 70
Surplus Premium on Capital Stock Issued- 382, 462. 00

27. The plaintiff had over 10,000 employees of whom approximately 1,100 received 11,369 shares of treasury stock, having an aggregate market value of $483,100, as additional compensation under its bonus plan. The excess of this market value over the plaintiff’s basis (cost of $100,638 and expense of issuing new certificates of $16,304 or a total of $116,942) for such stock was $366,158. This excess was reported as a long-term capital gain in 1948, and a tax in the amount of $91,540 paid thereon. No part of the tax which was paid thereon by the plaintiff has been refunded or repaid. The difference of $366,158 between the plaintiff’s basis for the stock and the market value of the stock when distributed as additional compensation to its employees, less the tax paid thereon, was credited by the plaintiff on its books to its capital surplus account.

28. With respect to the treasury stock which the plaintiff distributed in the manner described in findings 24 and 27, it charged the fair market value of the stock on its books to the account designated “ ‘B’ bonus” expense account, which for accounting purposes was classified as “wage and salary costs.”

29. On its tax returns for the years 1948 through 1952 covering income and excess profits taxes (1950-1952) the plaintiff reported the market values of the treasury stock as “salary or wages” paid, and deducted those amounts from gross income in determining the amount of taxable income for income and excess profits tax purposes.

30. When the plaintiff distributed this treasury stock to its employees in 1948, it informed each employee (on the stub of the actual bonus check) of the total amount of his bonus and the fair market value of the stock which was delivered to him. The plaintiff’s letters transmitting the bonus stock to its employees contained the following paragraph:

For the first time since 1937 we are paying a part of the bonus — approximately 25% — in common stock of the company. We believe the key personnel who share in the bonus will appreciate this opportunity to increase their interest in the company and to participate as stockholders as well as employees in its continued growth and prosperity.

31. The facts pertinent to a determination of the right of the plaintiff to recover for the year 1948 are in all material respects similar to those pertinent to a determination of its right to recover for the years 1949, 1950, 1951 and 1952. The excess of the market value over the plaintiff’s cost for the treasury stock distributed during those years by the plaintiff as additional compensation under its bonus plan was as follows:

1949 _$379,312
1950 _ 553,974
1951 - 465,258
1952 365,065

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover and judgments will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amounts due thereunder, it was ordered on March 11,1960, that judgment for plaintiff be entered for the following years and amounts, together with interest thereon as provided by law:

1948 -$91,901.38
1949 - 95,440.47
1950 - 139,221.92
1951_117,132.31
1952 - 95, 541.57 
      
       Exchanged for the business of another company, as stated above.
     
      
       This relates to the particular shares mentioned In finding 3 above.
     
      
      Two-for-one split November 23, 1937
      Two-for-one split March 29, 1946
     
      
       The difference between $2,233,133 in the resolution of the Board of Directors and the amount accrued of $2,225,215.74 lies in the fact that bonus awards of $7,917.26 were made to employees of a Canadian subsidiary. The $7,917.26 was paid in cash.