New-York tribune., 1921-11-22
Courts Stock
Tax Ruling Nets
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Prairie Pipe Line Company under the
law of Kansas and transferred all its
pipe line property to it In considers-
ton of the issue and delivery of the
entire capital stock OF the new com
pany to be distributed pro rata to the
stockholders Of the Prairie Oil and
Gas Company. Similarly, the Ohio Oil
Company organized the Illinois Pipe
Line Company under the laws of Ohio
and there was like transfer Of proper
ty and distribution of stock.
Suit Over Stock Distribution
Rockefeller and Hardness were own
ers of large amounts Of stock in both
the Prairie and Ohio companies, and
received stock of the new companies
In 1915. Income tax assessments were
imposed on them and Rockefeller and
the executors OF Hardness went to
court contending the distribution OF
stocks Of the pipe line companies in
this manner WAS not dividends and in
come. The view of the court. however
was expressed to-day as follows:
THE new stock represented assets
Of the oil company standing in the
place Of the pipe line properties that
before had constituted portions OF
their surplus asets. end it was capable
OF division among the stockholders, af
was in substance and effect, not merely
in form. 3 dividend of profits by the
corporation and individual income t.
the stockholders.
Justices McReynolds and Van De
vanter dissented.
In the case from the Court OF Claims
that the United States, appellant, vs.
c. W. Phellis, the Court Of Claims hat
sustained the contention Of Phellis fol
u refund of certain money paid by hin,
under protest in discharge of an addi-
tional tax assessed against him for 1918
This was based upon alleged income
equivalent to the market value of SOC
shares Of stock of a Delaware corpora
ton called the Il. l. du Pont de
Nemours Company, received by him 81
dividend upon his $50 shares Of stock
of the E. I. du Pont de Nemours Powde,
Company of New Jersey. In and prior
NE 1916 the New Jersey corporation
Neo accumulated q surplus of about
$40, 100000 and it undertook to dis
tribute this surplus A new corpora
tion was formed under the laws OF
Delaware with capital of %2s0 900, ,00t
and to this new corporaton all tbs
assets an6 good will Of the New Jersey
corporation were transferred rs an en-.
tirety as of October l. 1915, at a valua.
assuming all obligations of the old ex.
cept its capital stock and funded debt
The common stock Of the Delaware
company was distributed AS q dividend
Of two shares for one Of the holders OF
common stock.
Holds Dividend Gain
The court found to-day that "in sub.
stance and fact, as we'll as in appear
ance, the dividend received by claimant
WIS gain, a profit, derived from his
! capital interest in the old company, no
in liquidation OF the capital but in dis
tribution of accumulated profits of the
company; something Of exchangeabe
value produced by and proceeding from
his investment therein, severed from il
and drawn by him for his separate use
Hence it constituted individual income
within the meaning of the income tax
! law, as clearly as was the case in Pea
body vs. Eihner, 247 T.. S. 347."
The court holds that "in creating tn e
common stock of the new company and
transferring it to the old company 70,
distribution pro rata among it's stock
holders. the parties were acting in the
exercise of their rights for the very
purpose Of placing the common stock
holders individually in possession OF
new and substantial property rights in
esse, in realization Of their former COM
tlngent right to participate eventually
in the accumulated surplus"
Justice McReynolds and Justice Van
Devanter dissented. They sustain the
Court of Claims view that this re-
organization was merely financial
reorganization OF the business of the
company" and that Congress did not
intend to tax as income a "husiness
transaction which admittedly produced
no gain, no profit"