Court Opinion

ID: 4494608
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:13:55.21799+00
Date Added: 2024-06-11T15:04:01.627882
License: Public Domain

Smith,
dissenting: In the majority opinion it is held that when the Windsor Tobacco Growers Corporation acquired 400 shares of its stock on December 31, 1926, for cash and securities of an aggregate value of $127,473.40, it distributed by virtue of section 201 (b) of the Revenue Act of 1926 all of its earnings accumulated since February 28, 1913, in the amount of $68,281.69. I dissent. Section 201 provides, so far as material, as follows:
Sec. 201. (a) The term “ dividend ” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a)of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or Increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.
(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or 'profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
The holding of the majority opinion can-only be sustained by holding that the exchange of assets for the 400 shares of stock, in *816question was a “ distribution ” within the meaning of paragraphs (b) and (c) quoted above.
The definition of the word “ distribute ” is “ To divide among several or many; to deal out; apportion; allot.” Each stockholder of the Windsor Tobacco Growers Corporation stood on the same plane; that is, there was only one class of stock. If a dividend had been paid by the corporation the dividend would have been distributed pro rata to the shareholders. If the assets had been divided among the stockholders in liquidation there would have been a pro rata apportionment to the several shareholders, and this is true whether there was a division of all of the assets or only a part of them.
I can not subscribe to the view that, where a corporation acquires a portion of its shares not for cancellation but for subsequent sale or for reissuance to its stockholders as a stock dividend, the amount paid in the acquisition of the shares is a distribution of the amount paid therefor within the contemplation of section 201. The reac-quirement by a corporation of a portion of its shares and the resale thereof or the reissuance thereof is a transaction too common to be ignored. As was stated by the circuit court of appeals in Commissioner v. Woods Machine Co., 57 Fed. (2d) 635; certiorari denied, 287 U.S. 613:
* * * where * * ⅜ a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. * * *
The shares of stock of a corporation constitute property separate and apart from the property of the corporation. It may have a situs entirely independent of the situs of the assets of the corporation or even of the situs of the stockholder. Cf. DeGanay v. Lederer, 250 U.S. 376; Commissioner v. Brooks, 288 U.S. 378.
The facts here are that the corporation acquired 400 shares of its capital stock on December 31, 1926, at a cost of $127,473.40. The basis for the gain or loss to the stockholders selling the 400 shares is laid down by section 202 of the Revenue Act of 1926. If they realized a gain upon the transaction it is taxable to them, and if they realized a loss they are entitled to deduct the loss. The stipulated facts do not show that the corporation’s surplus or earnings were affected by such transaction. Neither did the corporation distribute anything to its stockholders when it reissued the 400 shares acquired as a stock dividend. Hugh R. Wilson, 3 B.T.A. 957. The only distributions by the corporation, so far as shown by the stipulated facts, subsequent to December 31, 1926, were the payment of dividends to its stockholders of $16,000 in 1926 and $4,000 in 1927, *817and the distribution of February 29, 1928, at which time the corporation distributed to its stockholders $3,706.14 cash and fixed assets of a fair market value of $180,000. I think that the respondent was correct in refusing to allow the contention of the petitioners that there was a distribution of any of its earnings at the time the corporation acquired 400 shares of its stock from the estates of I. J. Steane and Alfred A. Olds for $127,473.40 and in contending that the corporation did distribute to the petitioners on February 29, 1928, the total amount of its earnings accumulated since February 28, 1913, less those which had been distributed as dividends.
A necessary corollary to the holding in the majority opinion is that whenever a corporation purchases any of its outstanding shares it distributes earnings accumulated since February 28, 1913. I can not believe that this is a proper construction of the statute.
Black and Teammell agree with this dissent.