Court Opinion

ID: 4604737
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:34:51.850302+00
Date Added: 2024-06-11T07:53:03.672994
License: Public Domain

SILAS H. BURNHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  CHARLES STUART, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  GEORGE W. HOLMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Burnham v. CommissionerDocket Nos. 53795 - 53797.United States Board of Tax Appeals29 B.T.A. 605; 1933 BTA LEXIS 911; December 21, 1933, Promulgated *911 Frank D. Williams, Esq., for the petitioners.  P. M. Clark, Esq., for the respondent.  MATTHEWS *605  These three proceedings arise upon deficiencies in income tax determined for the calendar year 1928.  The amounts of these deficiencies are as follows: Docket No. 53795, Silas H. Burnham$4,445.52Docket No. 53796, Charles Stuart1,048.81Docket No. 53797, George W. Holmes2,365.43They were consolidated for hearing, since they all involved the same question, namely, whether a distribution of stock to the several petitioners in 1928, by a bank of which they were stockholders, was a stock dividend and nontaxable, or, under section 115(g) of the Revenue Act of 1928, taxable as being "essentially equivalent to the distribution of a taxable dividend." *606  FINDINGS OF FACT.  On March 31, 1928, and through May 3, 1928, the several petitioners were all owners of record of stock in the First National Bank of Lincoln, Nebraska, in the following amounts: Silas H. Burnham1,931 sharesCharles Stuart459 sharesGeorge W. Holmes396 sharesThe capital stock of the First National on March 31, 1928, was $525,000*912  (5,250 shares, par value $100) and its capital, surplus, and undivided profits, combined, were $1,100,000.  By March 31, 1928, terms and conditions had been tentatively agreed upon for the merger of the current business of the City National Bank in Lincoln with that of the First National Bank of Lincoln.  On March 31, 1928, the First National's stockholders representing 4,726 shares, all but 28 shares having signed, executed an agreement by and between themselves which set forth in the terms and conditions of the proposed merger as follows: WHEREAS, terms and conditions have been tentatively agreed upon for a merger of the current business of the City National Bank in Lincoln, Nebraska, with that of the First National Bank of Lincoln, Nebraska, under a contract which shall provide that said The First National Bank of Lincoln shall at the close of business March 31, 1928, take over, assume and agree to pay all the liabilities to depositors as shown by its books at the close of business March 31, 1928, of said City National Bank in Lincoln, in consideration for which said City National Bank in Lincoln, pursuant to authority first having been obtained from shareholders owning not*913  less than two-thirds of its capital stock and from its board of directors, shall execute and deliver to said The First National Bank of Lincoln its promissory collateral note bearing date of March 31, 1928, in favor of said The First National Bank of Lincoln, in an amount or sum equal to the total amount of said liabilities so to be assumed, due and payable on or before twelve months after date with interest thereon from date at six per cent per annum and collateralized with all of the assets of every kind and character belonging to said City National Bank in Lincoln on said date, and, WHEREAS, the said terms and conditions also contemplate that shareholders of said The first National Bank shall on or immediately after March 31, 1928, take all necessary legal steps and as soon as possible effect an increase in capital stock of said The First National Bank of Lincoln, also effect an adjustment of the surplus fund and net undivided profits of said bank which shall result in said bank having authorized capital of Eight Hundred Thousand Dollars ($800,000.00), also surplus and/or net profits of Three Hundred Thousand Dollars ($300,000.00) fully earned or paid up, and WHEREAS, said terms*914  and conditions further contemplate that the shareholders of said The first National Bank of Lincoln, or certain thereof, shall agree to sell, effective March 31, 1928, and make delivery as soon thereafter as possible, under the terms and conditions hereof, to the shareholders of said City National Bank in Lincoln, or certain thereof, Eighteeen Hundred (1800) shares of the capital stock of said The First National Bank of Lincoln upon the *607  basis of said proposed increase and/or adjustment in said capital, surplus and/or net profits, and that the price for which said stock shall be sold shall be One Hundred Thirty-seven Dollars Fifty Cents ($137.50) per share, and, WHEREAS, said terms and conditions incidental to the proposed merger further contemplates said City National Bank in Lincoln being placed in voluntary liquidation by its shareholders after transferring its current business as herein provided, together with the value thereof and good will, as aforesaid, as a part of the consideration for which its said shareholders, or certain thereof, shall have the option to purchase stock of said The First National Bank of Lincoln, necessitating the increase and/or adjustment*915  in capital, surplus and/or net profits of said The First National Bank of Lincoln as herein provided.  The stockholders then authorized, empowered, and directed the directors and appropriate officers to effect the proposed merger and to call a stockholders' meeting to increase the bank's capital stock and the number of directors, and agreed to support these measures at such meeting, in person or by proxy.  A further clause follows: That we and each of us bind ourselves, our heirs, administrators, executors and/or assigns, to sell so much of our stock or so many of our shares of stock of The First National Bank of Lincoln to the individual shareholders of said City National Bank in Lincoln, or certain thereof, and to make delivery of said stock to them or to their duly constituted attorneys or agents, as herein provided, upon payment of the purchase price of One Hundred Thirty-seven Dollars Fifty Cents ($137.50) per share as herein mentioned, as may be necessary in proportion to our respective holdings and ownership of said stock to make available a total of Eighteen Hundred (1800) shares of said stock to be so sold and delivered as herein specified, provided, however, that all*916  of the said stock to be so sold and delivered shall be by us first assigned and delivered to H. S. Freeman or P. R. Easterday, as our authorized agent to handle and make delivery or disposition of said stock and to make collection of the proceeds of the purchase price thereof, as aforesaid, and distribution thereof among us.  A corresponding contract was on the same day executed by and between more than two thirds of the stockholders of the City National.  The recital in the agreement relative to the 1,800 shares in the First National, which would be transferred by that bank's stockholders to the City National's stockholders, was therein outlined as follows: * * * that the individual shareholders of said The First National Bank of Lincoln, or certain thereof, shall, immediately after said increase in capital is effected, make available for transfer and cause to be transferred for account of the individual shareholders of the City National Bank in Lincoln, or certain thereof, Eighteen hundred (1,800) shares of the capital stock of said The First National Bank of Lincoln, in accordance with a certain agreement of even date herewith executed by the said individual shareholders of*917  said The First National Bank of Lincoln, or certain thereof, and at the price of One Hundred Thirty-seven Dollars and Fifty Cents ($137.50) per share specified in said agrement, conditioned, however, upon said shareholders of said City National Bank in Lincoln, or certain thereof, for the purpose of said proposed merger, authorizing an agent, or agents, with full power to act, to execute on their behalf a promissory note, or notes, of even date herewith, for the purchase *608  price of said stock in the aggregate amount of Two Hundred Forty-seven Thousand Five Hundred Dollars ($247,500.00), in favor of said The First National Bank of Lincoln, due and payable on or before twelve months from March 31, 1928, with interest thereon from date at six per cent per annum, with the understanding that the said Eighteen Hundred (1,800) shares of stock so to be transferred shall be pledged to, or trusteed with, a trustee, or trustees, designated by said The First National Bank of Lincoln, as collateral security or indemnity, first, for the payment of said note, or notes, aggregating the sum of Two Hundred Forty-seven Thousand Five Hundred Dollars ($247,500.00) aforesaid, and, second, as additional*918  security for the payment of the promissory collateral note of the said City National Bank in Lincoln also hereinbefore mentioned, it being the purpose and understanding of the terms hereof, that, when said The First National Bank of Lincoln has been satisfied, reimbursed, or paid in full the amounts represented by the promissory collaterall note of the City National Bank in Lincoln and the note, or notes of the agent, or agents for the shareholders of said City National Bank in Lincoln as mentioned herein, together with interest thereon, whatever collateral, consisting of all or any part of the assets of said City National Bank in Lincoln for all or any part of said Eighteen Hundred (1,800) shares of stock there may be on hand and not sold or liquidated for the satisfaction of said notes shall revert back to the designated liquidating agent for said City National Bank in Lincoln and to the agent, or agents, for the shareholders of said bank, as aforesaid, respectively, * * * The City National's stockholders then mutually agreed to voluntary liquidation of the bank; empowered the directors to deliver any obligation of the bank necessary for the liquidation and merger, with the understanding*919  that such obligation should be enforceable against themselves individually on failure of the collateral pledged; authorized the sale and transfer; and appointed E. G. Stephenson, Stanley Maly, and Paul H. Holm - * * * our true and lawful attorneys, or agents, to act for and represent us and each of us in the purchase of Eighteen Hundred (1,800) shares of the capital stock of the First National Bank of Lincoln at One Hundred Thirty-seven Dollars and Fifty Cents ($137.50) per share, to be distributed among us and each of us and paid for by us and each of us in the proportion which the number of said Eighteen Hundred (1,800) shares of stock would be when prorated according to the number of shares of stock of the City National Bank in Lincoln owned by the signers hereof, * * * and we especially authorize and empower our said attorneys, or agents, to execute on our behalf, in their names as our attorneys, or agents, or in our names by them as our attorneys, or agents, a note, or notes for the aggregate sum of Two Hundred Forty-seven Thousand Five Hundred Dollars ($247,500.00) as the total purchase price for said Eighteen Hundred (1,800) shares of stock, said note, or notes, to be of even*920  date herewith, in favor of the First National Bank of Lincoln, Nebraska, due and payable on or before twelve months from date with interest thereon at six per cent per annum and collateralized with said Eighteen Hundred (1,800) shares of stock so purchased.  On the same day, March 31, 1928, the assenting stockholders of the First National, including the three petitioners, Burnham, Stuart, *609  and Holmes, gave powers of attorney to H. S. Freeman and P. R. Easterday - To do and consent to any matter or thing for the purpose of consummating and carrying out that certain agreement dated March 31, 1928, signed or to be signed by two-thirds of the shareholders of The First National Bank of Lincoln, Nebraska, to sell 1800 shares of the capital of said bank to shareholders of City National Bank in Lincoln, and to do all matters and things connected therewith or pertaining thereto and with full right, power and authority to make such changes and modifications in said proposition, arrangement and plan as they shall deem fit or proper; to subscribe, receive and receipt for the undersigned's pro rata share of any stock dividend that may be declared by The First National Bank of Lincoln, *921 Nebraska; to assign and to cause to be delivered for and on account of the shareholders in City National Bank in Lincoln, my pro rata share of the 1,800 shares of stock in The First National Bank of Lincoln, Nebraska, as provided in said agreement of March 31, 1928; and to receive and receipt for the cash to be due the undersigned for and on account of my said shares to be so delivered, and to account to the undersigned for the proceeds thereof any my pro rata share of such stock dividend remaining.  On the same day, March 31, 1928, a contract was executed by and between the First National Bank and the City National Bank by their respective officers.  The contract, after reciting that stockholders owning two thirds of the capital stock of First National and stockholders owning two thirds of the capital stock of the City National had consented in writing to the plan, provided that prior to opening of business on April 2, 1928, the First National would assume and pay the deposit liabilities of the City National and that the City National, in consideration, would give its note in the amount of $3,472,928.72 (being the aggregate of the deposit liabilities assumed) payable on March 31, 1929, with*922  interest at 6 percent payable monthly, the note to be secured by all the assets of the City National, except the leasehold on its banking rooms and the fixtures contained therein.  The contract further provided: IV.  First National Bank shall make credits on said note of $3,472,928.72 of City National Bank, as follows: (a) The amount of cash delivered; (b) The amounts delivered, representing balances due from banks, bankers and trust companies.  The First National Bank, at its option, shall have the right to receive in payment on said City National Bank note any of the assets of City National Bank at the present worth value at the time received by First National Bank in payment Under other provisions the First National might use its own discretion in extending payment of bills receivable and mortgages; expenses of collecting on the City National's assets were to be a first lien on the assets; if the notes were not paid in full in one year, the *610  First National might sell the remaining assets; the City National was to deliver to the First National a resolution of its stockholders calling for voluntary liquidation of the City National under the United States Statutes, *923  and the naming of a liquidating agent; when the City National's note to the First National was paid, all assets of the Former remaining with the First National were turned over to the liquidating agent of the City National, but if the note was unpaid by the liquidation proceeds, "then and in such event it shall be the right and privilege of First National Bank to proceed to collect such deficiency from the stockholders of City National Bank through the individual liability of such stockholders, as provided by law." Negotiations with the City National proceeded on the basis that the stockholders of the City National would be entitled to buy at book value a 22 1/2 percent interest in the First National.  The decision to increase the capital stock of the First National and the amount of the increase was determined by the First National alone.  It was not desired to increase the net worth of the First National, but it was thought advisable with the increased business to increase the capital stock.  On the same day, March 31, 1928, pursuant to the contract between the First National and the City National, the City National Bank.  by Stanley Maly, its executive vice president, executed*924  a promissory note payable "on or before March 31, 1929" to the First National Bank for $3,472,928.92, which was the amount, as stated on the note, of the deposit liabilities of the City National as shown on its books at close of business March 31, 1928, without accrued interest, and by such note the City National assigned and transferred to the First National, as security for its payment, the following: (a) All cash on hand of the City National Bank; (b) All moneys due City National Bank from other banks, bankers and trust companies; (c) All of the bills receivable and accounts receivable and choses in action of City National Bank; (d) All bonds owned by City National Bank; (e) All real estate and all other property, real, personal or mixed, owned by City National Bank and not included in the proceding itemization of property, except leasehold on banking rooms and the fixtures contained in said rooms and vaults.  Between the close of business on Saturday, March 31, 1928, and Monday, April 2, the First National took over the deposit liabilities of the City National, and from the latter date all depositors transacted their business at the banking house of the First National. *925  Pursuant to the agreement of City National's stockholders set out above three notes of $82,500 each, totaling $247,500, were executed respectively by Paul H. Holm, Stanley Maly, and E. B. Stephenson, *611  as "Trustee for bank stockholders." The notes were identical in form and amount and were all dated March 31, 1928.  Each maker promised to pay to the First National, "on or before March 31, 1929", $82,500 with interest at 6 percent, and pledged as security for such payment: Six hundred (600) shares of the capital stock of the First National Bank of Lincoln, Nebraska.  This collateral is also hereby pledged as additional security for the note of City National Bank in Lincoln, dated March 31, 1928, for Three Million, four hundred seventy-two thousand, nine hundred twenty-eight and 92/100 ($3,472,928.92) Dollars, and any renewal or renewals thereof or any part thereof.  These notes to be secured, as stated above, were for money borrowed to pay for the 1,800 shares of the First National stock which the First National's stockholders had agreed to sell to the City National's stockholders.  The notes were delivered to the First National on April 3, 1928, and on that date a*926  deposit of $247,500 was made in the First National in a new account, "Stockholders' Account", by H. S. Freeman and P. R. Easterday, agents.  The directors of the First National, at a meeting held on March 31, instructed the officers to call a special meeting of the stockholders to be held on May 2, for the purpose of voting to increase the capital stock from $525,000 to $800,000 and to authorize an increase in the number of directors.  At the special meeting on May 2, more than the necessary two thirds were present and the meeting was adjourned to May 3.  At an adjourned meeting of the directors of the First National held May 3, 1928, it was moved and carried unanimously that $275,000 be withdrawn from the surplus account of the bank and transferred to the undivided profits account.  It was also moved and carried unanimously that, subject to the approval of two thirds of the stockholders, a stock dividend of $275,000 be declared, increasing the capital stock of the bank to $800,000, that this stock dividend be declared from the undivided profits account of the bank, and that the officers of the bank be instructed, upon receipt of the comptroller's approval of the increase, to*927  issue certificates covering the amount of the dividends to the shareholders, pro rata.  At the adjourned meeting of the stockholders held on May 3, 1928, they voted unanimously that under the provisions of section 5142, U.S. Revised Statutes, as amended February 25, 1927, the capital stock of the bank be increased in the sum of $275,000, making a total capital of $800,000, and Article V of the articles of association was amended so as to provide that the capital stock of the association be $800,000.  *612  It was also moved and carried unanimously "that a stock dividend of $275,000 be declared, increasing the capital stock of the bank to $800,000, and that this stock dividend be declared from the undivided profits account of the bank, and that the officers of the bank be instructed, upon receipt of the Comptroller's approval of the increase, to issue stock certificates covering the amount of the dividend to the shareholders pro rata." The approval of the Comptroller of the Currency to the increase in the capital stock was given between May 3 and May 7, 1928.  On May 7, 1928, certificates for the stock dividend were issued to the stockholders of the First National, the*928  certificates issued in the names of the several petitioners being in the following amounts: Silas H. Burnham, certificate No. 943 for 1,011.4774 shares Charles Stuart, certificate No. 989 for 240.4286 shares George W. Holmes, certificate No. 964 for 207.4286 shares The certificates issued in the names of the stockholders were not delivered to the stockholders, but to their agent, Easterday, who endorsed each certificate with the stockholder's name "by P. R. Easterday, Attorney-in-Fact", and then delivered them to officers of the First National, directing them to issue new certificates of stock to the several stockholders, including petitioners, for the number of shares of the stock dividend each shareholder would have left after taking out the proportion of the shares received which he had agreed to sell to City National stockholders, and three certificates of 600 shares each in the name of "H. S. Freeman and P. R. Easterday, Trustees under stockholders' agreement of March 31, 1928." The three certificates in the name of Freeman and Easterday, as trustees, were endorsed by them as trustees and delivered to Holm, Stephenson, and Maly, agents of the stockholders of the City National*929  Bank, and by them deposited with the First National as collateral security for the three notes for $82,500 each.  The new certificates issued in the name of the several petitioners were as follows: Silas H. Burnham, certificate No. 1061 for 349 shares Charles Stuart, certificate No. 1043 for 83 shares George W. Holmes, certificate No. 1049 for 72 shares On May 9, 1928, Easterday, as the stockholders' agent, delivered the above certificates to the petitioners, together with checks drawn on the stockholders' account opened by Easterday and Freeman in the First National, already mentioned, in the following amounts, representing payment of $137.50 a share for the difference in shares between the original certificates issued and those now delivered: Silas H. Burnham,$91,033.55 for 662.4774 sharesCharles Stuart, 21,638.56 for 157.4286 sharesGeorge W. Holmes, 18,668.56 for 135.4286 shares*613  The same course of procedure was followed with respect to the other assenting stockholders of the First National, the checks being signed "H. S. Freeman and P. R. Easterday, attorneys in fact." When presented for payment the checks were charged by the bank*930  against the stockholders' account opened by Easterday and Freeman.  As the assets of the City National held as collateral were liquidated, payments were made on the large note for $3,472,928.92.  This note was fully satisfied and paid on July 11, 1928.  The excess assets were turned over to Maly, who was liquidating agent of the City National.  As the remaining assets were liquidated, payments were made on the three notes for $82,500 each.  These notes were fully satisfied and paid on October 1 and October 10, 1928, and February 7, 1929, respectively.  Maly, as liquidating agent of the City National, collected for the assets sold, deposited the amount in his account as liquidating agent, and drew checks against such account for payments on the notes.  About a year after the notes were paid Maly distributed $100,000 from the proceeds of the remaining assets to the stockholders of the City National and still held about $90,000 of unliquidated assets.  Upon the satisfaction of the three notes totaling $247,500, given by Holm, Stephenson, and Maly, and upon the surrender of the three 600-share certificates of First National stock which had been held as collateral for the notes, the*931  First National caused to be issued and distributed to the various stockholders of the City National stock certificates, numbers 1104 to 1147 and 1088 to 1092, inclusive, for a total of 1,800 shares of First National stock.  Other than the stock dividend declared on May 3, 1928, the First National made no distribution to its stockholders in the remainder of the calendar year 1928, except the regular quarterly dividends on June 30, September 30, and December 31.  Respondent treated the cash received by petitioners from their agents on May 9, 1928, as cash dividends of $47.104 per share on the number of shares held on March 31, 1928, and determined that of such dividend $11.425 per share was paid from earnings accumulated after March 1, 1913, and taxable, while the remaining $35.718 was from earnings accumulated prior to March 1, 1913, and not taxable.  OPINION.  MATTHEWS: Respondent contends that the distribution here made was in pursuance of a plan of merger which required the petitioners to transfer a portion of the stock dividend to an agent of the First National Bank and to receive cash in exchange and that the transfer, therefore, falls squarely within section 115(g) of*932  the Revenue Act *614  of 1928, quoted in the margin, 1 as essentially equivalent to the distribution of a taxable dividend.  The petitioners contend that a stock dividend was declared and paid by the First National, that no part of the stock was canceled or redeemed, that none of the assets of the First National were distributed to its stockholders, that the cash received by the petitioners for their stock in the First National was received from the stockholders of the City National and could not, thereforeConstitute a cash dividend from the First National.  *933 Prior to February 25, 1927, a national bank could not lawfully declare a stock dividend; see 32 Op.Atty.Gen. 325, holding that under sections 57, 58, and 60 of Title 12, U.S. Code Annotated, national banks cannot lawfully declare stock dividends.  On February 25, 1927, the National Banking Act was amended so that section 57 of Title 12, U.S. Code Annotated (sec. 5142 U.S. Revised Statutes), reads as follows: Any national banking association may, with the approval of the Comptroller of the Currency, and by a vote of shareholders owning two-thirds of the stock of such associations, increase its capital stock to any sum approved by the said comptroller, but no increase in capital shall be valid until the whole amount of such increase is paid in and notice thereof, duly acknowledged before a notary public by the president, vice president, or cashier of said association, has been transmitted to the Comptroller of the Currency and his certificate obtained specifying the amount of such increase in capital stock and his approval thereof, and that it has been duly paid in as part of the capital of such association: Provided, however, That a national banking association*934  may, with the approval of the Comptroller of the Currency, and by the vote of shareholders owning two-thirds of the stock of such association, increase its capital stock by the declaration of a stock dividend, provided that the surplus of said association, after the approval of the increase, shall be at least equal to 20 per centum of the capital stock as increased.  Such increase shall not be effective until a certificate certifying to such declaration of dividend, signed by the president, vice president, or cashier of said association and duly acknowledged before a notary public, shall have been forwarded to the Comptroller of the Currency and his certificate obtained specifying the amount of such increase of capital stock by stock dividend, and his approval thereof.  The "Instructions of the Comptroller of the Currency, Relative to the Organization and Powers of National Banks," 1928 edition, in chapter 6, Earnings and Dividends, contains this instruction with *615  respect to the increase of capital by the declaration of a stock dividend: If it is desired to increase the capital stock of the bank out of its surplus and profits, this can be done either by the declaration*935  of a stock dividend or by the declaration of a dividend payable in cash, the dividend checks being accepted in payment for the new stock.  If it is decided to increase it by the payment of a stock dividend, the statute requires that the surplus of the bank be continued at an amount equal to 20 percent of its capital stock after the increase.  Funds in the surplus account exceeding that amount may be withdrawn and credited to undivided profits.  A dividend can then be declared therefrom by the directors payable in stock, but the stock certificates can not be issued as a dividend until after all the legal requirements have been complied with and the comptroller's certificate authorizing an increase received.  If the officers advise that a stock dividend is contemplated, a special form of the resolution of shareholders providing for the increase in capital and the certificate of the president or cashier certifying to the increase will be furnished.  The First National complied with the requirements of the statute and the instructions of the Comptroller of the Currency, in increasing its stock by the declaration of a stock dividend.  Its capital was $525,000 and surplus $575,000 prior*936  to the declaration of the stock dividend.  It carried $275,000 to the undivided profits account, leaving $300,000 in the surplus account, and declared a stock dividend of $275,000.  The $300,000 left in the surplus is more than the necessary 20 percent of the capital after the proposed increase required by the statute to be retained in surplus.  Although the assumption of the deposit liabilities of the City National by the First National and the sale of 1,800 shares of First National stock by its stockholders to City National stockholders were related and dependent propositions, the fact that First National shareholders had agreed to sell stock to City National shareholders, prior to the receipt of the dividends, does not make the payment for such stock in the manner described in the findings of fact a payment by the First National to its stockholders in redemption of a portion of the stock dividend.  The First National, before the increase of the stock, had capital, surplus, and undivided profits of $1,100,000.  After the increase of the stock and the distribution of stock dividends, the First National still had capital, surplus, and undivided profits of $1,100,000.  The sale by*937  the First National stockholders to City National stockholders of a portion of the stock received as dividends did not affect the amount of capital, surplus, and undivided profits, which was still $1,100,000.  At no time was any of the stock of the First National redeemed or canceled, and petitioners received no cash from the First National or an agent of the First National.  The provision of the statute on which respondent relies contemplates a distribution in cancellation or redemption of stock.  Here *616  there was no cancellation or redemption by First National of any portion of its stock.  The money which was distributed to petitioners for the shares of stock sold came from stockholders of the City National.  The fact that City National stockholders borrowed such amount from the First National, in the first instance, does not make this a payment by the First National.  The stockholders of the City National repaid the notes to the First National out of the proceeds of the excess assets after paying the note covering the deposit liabilities assumed by the First National.  Petitioners received a stock dividend from the First National and sold some of the stock received*938  immediately for $137.50 per share.  Any gain on such sale is includable in gross income and subject to both normal tax and surtax.  Any loss sustained is deductible.  Secs. 111 and 112(a).  The basis for determining the gain or loss on the shares of stock sold is the cost of the stock held on March 31, 1928, apportioned between such stock and the stock dividends distributed on May 7, 1928.  From the opening statements made by counsel for the parties, it was understood that there was no dispute as to the cost of the stock held by these petitioners on March 31, 1928.  The computation of the cost of the stock sold is, therefore, merely a mathematical computation which can be made in the recomputation of the deficiency under Rule 50.  Judgment will be entered under Rule 50.Footnotes1. SEC. 115.  DISTRIBUTIONS BY CORPORATIONS.  * * * (g) Redemption of stock.↩ - If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount to distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.  In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.