Court Opinion

ID: 4623083
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:52:11.319437+00
Date Added: 2024-06-11T07:56:17.960335
License: Public Domain

HAYSTONE SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Haystone Sec. Corp. v. CommissionerDocket No. 23160.United States Board of Tax Appeals19 B.T.A. 954; 1930 BTA LEXIS 2293; May 14, 1930, Promulgated *2293  A portion of a dividend declared and distributed in 1923 which represented earnings accumulated since February 28, 1913, held taxable as an ordinary dividend, regardless of whether or not it was part of a distribution in liquidation.  George E. Cleary, Esq., for the petitioner.  R. Wilson, Esq., for the respondent.  MURDOCK *954  The Commissioner determined a deficiency in income tax for the year 1923 of $24,107.99.  The petitioner alleges that "The respondent erroneously held that the petitioner was not entitled to deduct from gross income for the calendar year 1923 a loss of $191,401.42 sustained by the petitioner upon the disposition of 10,520 shares of stock of Pond Creek Coal Company." The parties entered into a stipulation which is incorporated in the findings of fact, and, in addition, the respondent introduced certain documents in evidence.  FINDINGS OF FACT.  (1) Haystone Securities Corporation, the petitioner herein, was throughout the calendar year 1923, at all times thereafter has continued to be, and still is, a New York corporation.  *955  (2) Pond Creek Coal Company (hereinafter called Pond Creek) was a Maine corporation*2294  throughout the calendar year 1923, and continued to be such until its dissolution on November 20, 1924.  Throughout the calendar year 1923 and at all times thereafter until its dissolution, the capital stock of Pond Creek was all of one class, and was represented by 212,920 outstanding shares of the par value of $10 each.  (3) Early in 1923 and prior to February 23, 1923, the petitioner purchased 10,520 shares of the capital stock of Pond Creek and paid therefor $457,818.  (4) At a meeting regularly held on February 15, 1923, the Board of Directors of Pond Creek duly passed the following resolution: VOTED: That a dividend of Thirty-Five Dollars ( $35) per share upon the outstanding Capital Stock of this Company be, and it hereby is, declared payable March 1st, 1923, out of earned surplus and paid-in surplus, to stockholders of record at the close of business February 23, 1923.  (5) Subsequently at the aforesaid meeting held on February 15, 1923, the Board of Directors of Pond Creek duly passed the following resolution: VOTED: That the President be, and he hereby is, authorized to call a Special Meeting of the Stockholders of this Company at such time as may be fixed by the*2295  President to take such action as the stockholders may determine upon with reference to the liquidation of the affairs of the corporation and with reference to the dissolution of the Corporation.  Prior to the passage of said resolutions no formal action had been taken by either the directors or stockholders of Pond Creek looking to the liquidation or dissolution of Pond Creek.  (6) On March 1, 1923, pursuant to the resolution of its Board of Directors set out at paragraph (4) supra, Pond Creek paid to its shareholders of record as of February 23, 1923, including petitioner, a distribution of $35 a share.  The total amount of said distribution was $7,452,200, of which amount $368,200 was paid to petitioner as owner of 10,520 shares of the capital stock of Pond Creek.  (7) The surplus of Pond Creek on March 1, 1923, just prior to said distribution of $7,452,200, was $7,452,200, of which amount $4,189,249.90 consisted of earnings or profits (less reserves for contingencies, liquidating expenses, and Federal income and profits taxes applied to the proper years) accumulated after February 28, 1913, and $3,262,950.10 represented paid-in surplus.  (8) At a special meeting regularly*2296  held on March 1, 1923, the stockholders of Pond Creek duly passed the following resolutions: VOTED: That the Directors be, and they hereby are, authorized to liquidate the affairs of the company, and at such time as they may determine upon, or from time to time, to distribute the assets available for distribution to the persons entitled thereto.  VOTED: That upon the liquidation of the affairs of this company in accordance with the full intent of the foregoing vote, the President or other officer of this company be, and he hereby is, authorized to file a bill in equity for the dissolution of the corporation without the appointment of a trustee, and that an answer to said bill be filed by the Clerk or Secretary admitting all the allegations thereof.  Said resolutions were the first corporate action authorizing or directing the liquidation and/or dissolution of Pond Creek.  (9) Thereafter in 1923 Pond Creek, pursuant to action taken by its Board of Directors under authority of the resolutions of its stockholders set out at paragraph (8) supra, distributed to each of its shareholders, in exchange for their certificates of stock of Pond Creek, $10 per share.  After this distribution*2297 *956  Pond Creek retained only sufficient assets to meet its outstanding liabilities, and its Board of Directors thereupon proceeded to take the necessary steps to secure its formal dissolution, which was accomplished on November 20, 1924.  (10) As its proportion of said distribution of $10 per share, the petitioner received from Pond Creek on May 9, 1923, the sum of $105,200, and turned over to Pond Creek for cancellation the certificates representing petitioner's 10,520 shares of stock of Pond Creek.  (11) In making its Federal income tax return for the calendar year 1923, which was filed on or about March 15, 1924, the petitioner reported as ordinary dividend income the same proportion, to wit, $206,983.42, of the total distribution of $368,200, received by it from Pond Creek on March 1, 1923, as the earnings or profits of Pond Creek accumulated since February 28, 1913, and available for distribution on March 1, 1923, to wit, $4,189,249.90, bore to the entire distribution of $7,452,200, made by Pond Creek on March 1, 1923, as aforesaid.  In its said return the petitioner reported the balance of the distribution of $368,200, received by it from Pond Creek on March 1, 1923, to*2298  wit, $161,216.58, and the entire distribution received by it from Pond Creek on May 9, 1923, to wit, $105,200, as payment in full for its 10,520 shares of Pond Creek stock.  Since the total of the amounts so treated as received in payment for its shares of Pond Creek stock, it with $266,416.58, was less by $191,401.42 than the cost to petitioner of said shares, to wit, $457,818, the petitioner in its said return reported a loss of $191,401.42 on the disposition of said shares.  (12) In his notice of deficiency from which this appeal is taken the Commissioner of Internal Revenue has disallowed as a deduction from petitioner's gross income for the calendar year 1923, the entire amount of $191,401.42 claimed as a loss on the disposition of petitioner's shares of stock of Pond Creek.  In said notice of deficiency the Commissioner has determined that to the extent of the cost to petitioner of its shares of Pond Creek, to wit, $457,818, the entire amount of the distributions received by petitioner from Pond Creek on March 1, 1923, and May 9, 1923, to wit, $473,400, represented payment for said shares, and that the excess, to wit, $15,582, of the amount of said distributions over the cost*2299  to petitioner of said shares constituted ordinary dividend income to the petitioner.  (13) The Commissioner's said notice of deficiency shows petitioner's taxable net income for the calendar year 1923 to be $1,246,172.25, and computes the tax and deficiency as follows: Computation of taxNet income$1,246,172.25Less: ExemptionNone.Subject to tax at 12 1/2%1,246,172.25Tax at 12 1/2%155,771.53Tax previously assessed131,663.54Deficiency24,107.99(14) If, as a matter of law, petitioner is entitled to the deduction of $191,401.42 claimed by it as a loss on the disposition of its 10,520 shares of stock of Pond Creek, petitioner's true net income for the calendar year 1923 was $1,054,769.83, and the correct amount of its deficiency in income tax for said year is $182.69, computed as follows: *957 Net income$ 1,054,769.83Less: ExemptionNone.Subject to tax at 12 1/2%1,054,769.83Tax at 12 1/2%131,846.23Tax previously assessed131,663.54Deficiency182.69(15) The notice of deficiency against which this appeal is taken was mailed to the petitioner on November 30, 1926, and this proceeding was duly commenced*2300  by the filing, on January 27, 1927, of a petition for a redetermination of the deficiency found by the Commissioner.  With the check for the dividend of $35 declared on February 15, 1923, a slip of paper was enclosed, on which the following appeared above the name of the treasurer of Pond Creek Coal Co.: On February 15, 1923, the directors of the Pond Creek Coal Comapny declared a dividend of thirty-five dollars per share upon the capital stock, payable March 1, 1923, to stockholders of record February 23, 1923.  The exact proportion of this dividend that is paid out of earned surplus can not be determined until the final settlement of all the accounts and debts of the company.  Stockholders will be notified relative thereto hereafter.  Under date of March 22, 1923, the treasurer of the Pond Creek Coal Co. addressed a statement to the stockholders in which the following appears: The Directors of the Pond Creek Coal Company have declared a final dividend, in liquidation, of $10.00 per share, payable on or after April 2, 1923, at The First National Bank of Boston and The Chase National Bank of New York, upon surrender of the outstanding stock certificates representing the said*2301  shares.  Under date of May 15, 1923, the treasurer of the Pond Creek Coal Co. addressed a statement to the stockholders which was as follows: According to our interpretation of the provisions of the United States Income Tax Law effecting distributions in liquidation, the dividend of $35.00 per share paid March 1, 1923, represented: Per shareDividend from Earnings Accumulated since March 1, 1913$19.675230Payment in Partial Liquidation of Capital15.324770Total payment35.000000and dividend of $10.00 per share payable on or after April 2, 1923, represented final payment in liquidation of Capital.  OPINION.  MURDOCK: The petitioner maintains that a distribution received by it in the amount of $368,200 on March 1, 1923, under the resolution of February 15, 1923, declaring a dividend of which its share was that amount, was an ordinary dividend to the extent of $206,983.42, *958  the amount of earnings of the Pond Creek Coal Co. accumulated since February 28, 1913, included in such distribution; that the balance of such distribution, amounting to $161,216.58, representing a distribution of paid-in surplus, should be applied against and reduce*2302  the cost of the stock to the petitioner; and that the distribution to the petitioner of $105,200 on May 9, 1923, in liquidation of the Pond Creek Coal Co., resulted in a loss of $191,401.42, this being the amount by which the cost of the stock, $457,818, exceeded the sum of the above mentioned $161,216.58, and the above mentioned $105,200.  Counsel for the respondent made no oral argument and filed no brief, so the only justification for the Commissioner's action we find in the explanation of the deficiency notice, which was in part as follows: Article 1545, Regulations 62 provides that "where a corporation distributes all its property in complete liquidation or dissolution, the gain realized by the stockholder from this transaction, computed under section 202, is taxable as a dividend to the extent that it is paid out of earnings or profits of the corporation accumulated since February 28, 1913." Accordingly the difference between the $473,400.00 received in liquidation and the cost of the stock $457,818.00 or $15,582.00 is held to be profit taxable as dividends.  Following the principles laid down in our previous decisions, our judgment in this case must be for the petitioner, *2303  regardless of whether the portion of the dividend in question was an ordinary dividend or a distribution in liquidation.  ; ; ; ; . Cf. ; . Judgment will be entered for the petitioner.