1 T.C. 59">*59 The Commissioner determined deficiencies in income tax against the petitioner for the years 1936 and 1937 in the amounts of $ 15,920.42 and $ 309.51, respectively. The issues are (1) whether certain shares of common stock or, at the option of the stockholders, 1942 U.S. Tax Ct. LEXIS 37">*39 $ 6 in cash 1 T.C. 59">*60 distributed by the petitioner to its preferred stockholders constituted a taxable dividend and is allowable as a dividends paid credit, (2) whether the respondent, after having ruled favorably to the petitioner on the transactions herein, is thereafter estopped to reverse his ruling, and (3) whether the respondent erred in disallowing a deduction for 1936 of $ 5,000 for reorganization expenses.

FINDINGS OF FACT.

The petitioner is a Missouri corporation, with its principal office in St. Louis.

At June 15, 1936, the petitioner according to its books had outstanding 33,268 shares of common stock and 9,635 shares of $ 3.25 cumulative preferred stock, 454 shares of the preferred stock being held in the petitioner's treasury. Each class of stock was without nominal or par value. At that time and exclusive of any dividends on treasury stock, the dividends on the preferred stock were in arrears in the amount of $ 70,432.09, or approximately $ 7.65 a share.

At a meeting of petitioner's board of directors held on June 15, 1936, a resolution was adopted proposing a recapitalization of the petitioner. On June 17, 1936, notice of a special stockholders' meeting to be held1942 U.S. Tax Ct. LEXIS 37">*40 on August 17, 1936, was sent to the stockholders. In this notice the plan of recapitalization to be acted upon was stated in substance as follows: (1) that the articles of incorporation be amended, making certain changes in the preferred stock; (2) that the company be recapitalized with an authorized capital of 90,000 shares, reclassified into 30,000 shares of $ 2.50 cumulative preferred stock without nominal or par value, and 60,000 shares of common stock without nominal or par value; (3) that the outstanding preferred stock be exchanged share for share for the new $ 2.50 cumulative preferred stock; and (4) that a dividend of one half share of common stock be declared, payable to the recipients of each share of new preferred stock in consideration of their exchange of the $ 3.25 preferred stock for the $ 2.50 preferred stock.

At the special meeting held on August 17, 1936, the stockholders approved the plan of recapitalization and adopted resolutions necessary for carrying it into effect. The resolution amending the articles of incorporation reads in part as follows:

Be It Resolved: That the Articles of Incorporation of the Knapp-Monarch Company be amended by striking out Article1942 U.S. Tax Ct. LEXIS 37">*41 Third and inserting in lieu thereof the following:

Third: The amount of authorized capital stock of this corporation is ninety thousand (90,000) shares. The number of shares with nominal or par value is none. The number of shares without nominal or par value is ninety thousand (90,000), divided into sixty thousand (60,000) shares of Common Stock and thirty thousand (30,000) shares of Preferred Stock. The capital with which the 1 T.C. 59">*61 corporation will begin business is Ten Thousand Dollars ($ 10,000.00), all of which has been fully paid up in lawful money of the United States and is now in the possession and custody of the persons named as the first Board of Directors of this corporation. Each share of Common Stock without nominal or par value of this corporation, issued and outstanding under the original Articles of Incorporation, shall be equivalent to one share of the Common Stock of this corporation, without nominal or par value, authorized to be issued under said Articles of Incorporation as hereby amended, and each share of Preferred Stock without nominal or par value of this corporation, issued and outstanding under the original Articles of Incorporation, shall be equivalent1942 U.S. Tax Ct. LEXIS 37">*42 to one share of the Preferred Stock of this corporation without par value authorized to be issued under said Articles of Incorporation as hereby amended, and certificates for such Common and Preferred Stock authorized to be issued by virtue of this amendment shall be issued in place and upon surrender of the certificates of such Common and Preferred Stock now issued and outstanding, on said basis, without in any way reducing, dividing, distributing or withdrawing the existing capital of the corporation, and the remaining shares of said Common and Preferred Stock without nominal or par value may be issued from time to time for such consideration and under such conditions as may be determined by the Board of Directors.

The preferences, priorities and conditions of the Preferred Stock are as follows:

1. Said Preferred Stock shall be entitled to receive annual cumulative dividends of $ 2.50 per share, and no more, payable quarterly when declared by the Board of Directors from the surplus earnings or net profits of the corporation on the first days of January, April, July and October of each year; said stock to be preferred both as to assets and as to dividends over the Common Stock of1942 U.S. Tax Ct. LEXIS 37">*43 the corporation. Whenever the full dividend on the Preferred Stock for all past dividend periods shall have been paid and the full dividend thereon for the current dividend period shall have been paid or declared, and a sum sufficient for the payment thereof set apart, the dividends upon the Common Stock may be declared by the Board of Directors out of the remainder of the net profits or the surplus earnings of the corporation; provided, however, that no dividend shall be paid on the Common Stock of the corporation the payment of which will reduce the ratio of current assets to current liabilities, determined according to recognized accounting practice, below two and one-half to one.

The holders of the Preferred Stock shall not be entitled to receive any stock dividends or to subscribe for any additional stock, or any bonds, notes, or debentures convertible into stock, that may at any time be authorized or issued by this corporation.

The stockholders also adopted the following resolution:

Be It Resolved: That the Board of Directors of the Knapp-Monarch Company be by the stockholders in meeting now assembled fully empowered and authorized in accordance with the plan adopted at this1942 U.S. Tax Ct. LEXIS 37">*44 meeting, without a further vote of the stockholders to declare a dividend of 1/2 share of the common stock of the corporation to the holders of the new preferred stock for each share of $ 2.50 preferred stock in consideration of their exchange of the $ 3.25 preferred stock for the $ 2.50 preferred stock, with such options and elections, and at such time as to the Board of Directors may appear proper and expedient, in order to carry out the proposition submitted to the holders of the old preferred stock, and as voted at this meeting.

1 T.C. 59">*62 Following a statement of the chairman of the meeting that one of the purposes of recapitalization was to increase the number of shares of preferred stock and sell them at an opportune time to provide working capital, the stockholders authorized the board of directors to sell the new preferred stock at such times, in such amounts and at such price as the directors might determine to be in the best interests of the petitioner.

By September 12, 1936, the above changes in petitioner's capital structure had been authorized by the proper officials of the State of Missouri, approval of the Securities and Exchange Commission for the issuance of the new1942 U.S. Tax Ct. LEXIS 37">*45 shares of stock had been obtained, and such new shares had been listed with the St. Louis Stock Exchange. In a letter dated September 12, 1936, and signed by its president the petitioner notified both classes of its stockholders of the completion of the necessary action preliminary to the issuance of the new shares and that they should immediately forward their old certificates to the petitioners' transfer agent in St. Louis for exchange for new certificates.

The letter contained the following:

This exchange is in accordance with the vote of our stockholders, at the special meeting duly held on August 17, 1936, approving the amendment to Article 3 of the Preferred stock provisions as set out in the letter to stockholders under date of June 17, 1936, and authorizing the Board of Directors of the Company to effect the exchange of the new $ 2.50 Cumulative Preferred stock for the outstanding Preferred Stock and, in addition to declare a Common Stock dividend to Preferred holders on the basis of one half share of Common Stock for each share of $ 2.50 Preferred Stock in lieu of the dividend arrearage on the prior issue.

* * * *

At the regular meeting of the Board of Directors of the Company, 1942 U.S. Tax Ct. LEXIS 37">*46 to be held on September 15, action will be taken on the dividend of one-half share in Common Stock on each share of the new $ 2.50 Preferred Stock in conformity with the plan approved by our stockholders at the special meeting of August 17, 1936. It is anticipated that this Common Stock dividend will be available to the Preferred stockholders in due course and will be forwarded by mail to the original holders of record of the new $ 2.50 Preferred Stock.

The regular quarterly meeting of the petitioner's board of directors was held on September 15, 1936. The treasurer informed the board that certain holders of considerable amounts of preferred stock were faced with the necessity of converting into cash the dividend in common stock to be declared, and that the offering of substantial amounts of common stock on the St. Louis Stock Exchange would probably depress the current market price therefor, which would be very undesirable at the time. After a discussion of the matter the board adopted the following resolution:

Be It Resolved: That the Knapp-Monarch Company, by its Board of Directors, declare a dividend on each share of the $ 2.50 preferred stock, payable at once 1 T.C. 59">*63 to the1942 U.S. Tax Ct. LEXIS 37">*47 original holders of record of the said $ 2.50 Preferred Stock, said dividend to be payable as follows: At the election of the stockholder, 1/2 share of the Common Capital Stock of the corporation for each share of the $ 2.50 Preferred Stock; or six dollars in cash for each share of the $ 2.50 Preferred Stock held; and Be It Further Resolved: That in view of the relatively small number of preferred stockholders, and their general familiarity with the company's program and the exigencies of the security market that said election to take the cash dividend terminate on October 1st, 1936, and that said dividend be paid at once upon receipt by the Company of notice by the stockholder of his election.

Following the adoption of the resolution and the presentation of information by the treasurer that earnings of the petitioner were available to pay the regular quarterly dividend of 62 1/2 cents that would be due on October 1, 1936, on the new preferred stock, the board declared an initial dividend of that amount on the new preferred stock payable October 1, 1936, to stockholders of record on September 25, 1936.

Pursuant to the plan and under the above quoted resolution, the petitioner during1942 U.S. Tax Ct. LEXIS 37">*48 1936 paid $ 3,252 in cash to the recipients of 542 shares of new preferred stock and issued 8,914 half shares of common stock to the recipients of 8,914 shares of the new preferred stock. In 1937 it similarly issued 178 half shares of common stock to the recipients of 178 shares of the new preferred stock. On its returns for 1936 and 1937 it claimed dividends paid credits in respect of the cash so paid and the common stock so issued. On its books it entered the common stock at $ 6 per half share but in computing the dividends paid credit used a value of $ 6.25 for each half share of common stock, $ 12.50 being the current market price for the said stock on the St. Louis Stock Exchange on September 15, 1936. The total dividends paid credit so claimed in respect of the cash and common stock for 1936 was $ 58,964.50, while the credit claimed for 1937 in respect of the common stock was $ 1,112.50.

In determining the deficiencies for each of the years in controversy the respondent concluded that the recapitalization of the petitioner in 1936 constituted a statutory reorganization and that the distribution of common stock to some recipients of the new preferred stock and cash to others1942 U.S. Tax Ct. LEXIS 37">*49 was not a distribution taxable as a dividend for the purpose of the dividends paid credit. In keeping with that conclusion he disallowed the dividends paid credits claimed by the petitioner for the respective years to the extent of the cash and common stock distributed pursuant to the plan of recapitalization.

In determining the deficiency for 1936 the respondent also disallowed a deduction of $ 5,000 taken by petitioner for reorganization expenses.

Subsequent to the meeting of the petitioner's board of directors on September 15, 1936, the petitioner submitted to the Commissioner copies of the various documents showing the above plan and the 1 T.C. 59">*64 action taken thereunder and requested a ruling (1) as to the taxable status to preferred stockholders of the exchange of old preferred stock for new preferred stock, and to the common stockholders of the exchange of old common stock for new common stock, (2) as to the taxable status to preferred stockholders of the distribution of one half share of common stock or $ 6 in cash and the initial dividend of 62 1/2 cents a share on the new preferred stock, and (3) as to the status of the distribution (one half share of common stock or $ 61942 U.S. Tax Ct. LEXIS 37">*50 cash) for the purpose of a dividends paid credit. In a letter dated November 24, 1936, the Commissioner ruled: (1) that under the provisions of section 112 of the Revenue Act of 1936 the petitioner's recapitalization constituted a reorganization and that the holders of the old preferred stock who exchanged that stock for new preferred stock and the holders of the old common stock who exchanged old common for new common realized no taxable gain or loss upon such exchanges, (2) that under the provisions of section 115 of the act the distribution of one half share of common stock or $ 6 in cash and the initial dividend of 62 1/2 cents on the new preferred stock were taxable as dividends in the hands of the recipients to the extent they were paid out of earnings or profits accumulated after February 28, 1913, or out of earnings or profits computed without regard to the amount of earnings or profits (whether of 1936 or accumulated since February 28, 1913) at the time the distribution and the initial dividend were declared, and, (3) in substance, that to the extent the distribution of one half share of common stock or $ 6 in cash and the initial dividend of 62 1/2 cents a share on the 1942 U.S. Tax Ct. LEXIS 37">*51 new preferred stock constituted dividends taxable in the hands of the shareholders and where actually received by the stockholders during 1936 they would constitute a dividends paid credit for that year. In February 1937 the petitioner sent the stockholders a copy of the Commissioner's letter of November 24, 1936, and advised them that the distribution of one half share of common stock or $ 6 in cash and the initial dividend of 62 1/2 cents a share on the new preferred were taxable to them as dividends and that they should pay the tax on them. In its income tax return for 1936 the petitioner claimed a dividends paid credit as heretofore stated. In October 1937 the return was examined by a revenue agent, who allowed the dividends paid credit substantially as claimed. The petitioner heard nothing more from the matter until March 14, 1940, one day before the expiration of the statutory period of limitations for making an additional assessment for 1936, when the same agent told the petitioner he had been requested to obtain from the petitioner a consent extending the period for making an additional assessment for 1936 until June 30, 1941. The agent told the petitioner that he did 1942 U.S. Tax Ct. LEXIS 37">*52 not know what 1 T.C. 59">*65 change the Commissioner proposed to make for 1936. The petitioner executed the consent as requested. The deficiency notice for 1936 was mailed to the petitioner on January 6, 1941.

OPINION.

The question here is whether cash paid and common stock issued to preferred stockholders as a part of the consideration for the exchange by them of $ 3 25 preferred stock for $ 2.50 preferred stock constituted a taxable dividend in the hands of petitioner's stockholders. If so, the petitioner is entitled under section 27 (a)¹ and (e)²1942 U.S. Tax Ct. LEXIS 37">*53 of the Revenue Act of 1936, to a dividends paid credit to the extent of cash plus the fair market value of the common stock so issued. If not, petitioner's claim of credit must be denied. Sec. 27 (h). ³

It is the claim of the respondent that surrender by the preferred stockholders of the old preferred stock and the receipt of the new preferred, plus common stock and cash, were steps in a reorganization, namely, a recapitalization, within the meaning of section 112 (g) (1) (D) of the statute, that the old preferred stock was surrendered in exchange for new preferred stock and common stock pursuant to the plan of reorganization, and under section 112 (b) (3), ⁴1942 U.S. Tax Ct. LEXIS 37">*55 the gain or income therefrom is not taxable. The petitioner concedes that there was a recapitalization and therefore a reorganization within the meaning of the statute. It contends, however, that the issuance of the half shares of common stock to the preferred stockholders was outside the reorganization1942 U.S. Tax Ct. LEXIS 37">*54 and not a part of the exchange of the old preferred stock for the new preferred but was the payment of a taxable dividend separate and apart from the exchange and therefore outside the scope of section 112 (b) (3). The respondent makes no claim that the petitioner did not have accumulated earnings or profits 1 T.C. 59">*66 within the meaning of section 115 (a)⁵ sufficient to cover a dividend of both the cash paid and the half shares of common stock herein issued. Neither is there any claim that the common stock was nontaxable because of a stock dividend within the meaning of the Sixteenth Amendment to the Constitution. Sec. 115 (f) (1). ⁶ If therefore the petitioner is correct in its claim that the issuance of the common stock to the old preferred stockholders was outside the reorganization and not a part of the exchange, its contention that the common stock was a taxable dividend is well taken, sections 115 (a), supra, and (f) (2), 6 and it is entitled to the dividends paid credit claimed in respect thereto.

1942 U.S. Tax Ct. LEXIS 37">*56 The petitioner rests its claim that the issuance of the half shares of common stock to the holders of the old preferred stock was outside the reorganization and not a part of the exchange, under section 112 (b) (3), supra, on the facts, and in its brief summarizes the facts as follows: "However, the facts disclose that the recapitalization was concluded on September 12, 1936, when the notice * * * was sent to the shareholders and informed them that their preferred shares were immediately exchangeable for new preferred shares and no mention was made of any other property, either in stock or otherwise, as being an incidental part of the exchange." Later in the brief and in further support of its claim that the issuance of the new preferred stock and the half shares of common stock to the holders of the old preferred were two separate and distinct transactions, it is stated that "For all practical purposes the separation of three days distinguishes actions and nothing in the record indicates that either was dependent upon the other for accomplishment."

The major difficulty with the proposition stated is that the record shows the facts to be exactly the opposite. At the time the 1942 U.S. Tax Ct. LEXIS 37">*57 plan of 1 T.C. 59">*67 reorganization was determined upon the preferred stock outstanding was the $ 3.25 preferred, with accumulated arrearages of dividends thereon amounting to approximately $ 7.65 per share. There was no proposal, and apparently no thought or intention, that the holders of such preferred stock would or should surrender such shares solely for the new $ 2.50 preferred stock, and certainly there is no indication that the holders of the old preferred stock would have agreed to such a proposal or would have made such an exchange if it had been proposed. The stockholders themselves on August 17, in establishing the plan, form, and substance of the recapitalization and in authorizing the directors to carry it out, provided that part of the consideration to be received in exchange for the old shares of preferred stock was to be the half shares of common stock, and in one of the resolutions that day adopted stated that the issuance of the half shares of common stock to the old preferred stockholders would be "in consideration of their exchange of the $ 3.25 preferred stock for the $ 2.50 preferred stock, with such options and elections, and at such time as to the Board of Directors1942 U.S. Tax Ct. LEXIS 37">*58 may appear proper and expedient, in order to carry out the proposition submitted to the holders of the old preferred stock, and as voted at this meeting." That the half shares of common stock were a part of the consideration passing in exchange for the old preferred stock and were so considered by all parties concerned was again indicated by the letter of September 12, on which the petitioner so strongly relies and wherein it was stated that the half shares of common stock would be issued to the preferred stockholders "in lieu of the dividend arrearage" on the old preferred and "in conformity with the plan approved by our stockholders at the special meeting of August 17, 1936." Furthermore, in requesting the holders of the old preferred stock to mail their old certificates to the petitioner's transfer agent in St. Louis, Missouri, those holders were assured that the directors within three days would take the necessary action to see that the remainder of the consideration, namely, the half shares of common stock, to be received in exchange for their old preferred shares would very shortly be forthcoming. To say that the holders of the old preferred stock surrendered their old preferred1942 U.S. Tax Ct. LEXIS 37">*59 shares in exchange only for the shares of new preferred would require the rewriting of the plan of reorganization, a revision of the agreement which the corporation, through the stockholders' resolution of August 17, had with the holders of the old preferred shares, and a changing of the consideration prescribed and actually passing therefor. Since the common stock was in fact issued pursuant to the plan of reorganization and was a part of the consideration for the exchange of the old preferred stock, and, being the shares of the corporation reorganized, the exchange falls squarely within the provisions of section 112 (b) (3), supra. South Atlantic 1 T.C. 59">*68 , 42 B. T. A. 705; Skenandoa Rayon Corporation, 42 B. T. A. 1287; J. Weingarten, Inc., 44 B. T. A. 798; and Humphryes Manufacturing Co., 45 B. T. A. 114.

The petitioner urges, however, that a different rule obtains here and that the issuance of the common stock was outside the reorganization and therefore a taxable dividend, because in effecting the issuance of the new preferred stock and the1942 U.S. Tax Ct. LEXIS 37">*60 half shares of common stock for the old preferred stock it was contemplated that the half shares of common stock should take the form of a dividend on the new shares of preferred stock; that a formal dividend resolution to that effect should be and was adopted and spread on the minutes of the corporation and the half shares of common stock were issued pursuant thereto. The same argument was advanced by the Commissioner in Commissioner v. Kolb, 100 Fed. (2d) 920, and was rejected. Under the plan in that case, the stock of the New York Co. was to be reclassified and debenture bonds were to be issued against its surplus. The new stock and debentures were to be issued to Maryland Corporation for substantially all of its assets. Maryland was then to be dissolved and the stock and debentures of New York distributed in liquidation. The debentures so distributed to the preferred stockholders of Maryland were to be in lieu of arrearages in dividends. The plan provided that New York, in issuing its new common stock and debentures to Maryland for its assets, should issue the debentures in the form of a dividend on the new common stock and that a formal1942 U.S. Tax Ct. LEXIS 37">*61 dividend resolution to that effect should be adopted. The dividend was declared and pursuant to the dividend resolution the debentures were issued as contemplated. On that state of the facts, the Commissioner argued that the debentures were outside and not an essential part of the reorganization or any exchange therein, that the nonrecognition provisions of section 112 were accordingly not applicable, and that the debentures constituted a taxable dividend. Regardless of the fact that the debentures were distributed in the form of a dividend and pursuant to the declaration of a dividend, the court rejected the contention of the Commissioner and held that the issuance of the debentures was nevertheless a part of a single transaction constituting the reorganization and therefore subject to the nonrecognition provisions of section 112. It is no answer to say, for the purpose of distinguishing the instant case, that in Commissioner v. Kolb the exchange in issue was the exchange by Maryland stockholders of their stock in liquidation. The liquidation of a corporation is not in and of itself a reorganization and standing alone the taxability of distributions in liquidation are1942 U.S. Tax Ct. LEXIS 37">*62 determined under section 115 (c), and the nonrecognition provisions of section 112 are not applicable. In Commissioner v. Kolb, it was the exchange of the New York shares and debentures for the assets of Maryland which 1 T.C. 59">*69 made the transaction a reorganization and fixed the character of the New York shares and debentures as the securities of a corporation a party to the reorganization, not the exchange in liquidation of Maryland. The court pointedly rejected the claim that the issuance of the debentures under the dividend resolution made any difference. It looked to the "ultimate consequence" and observed: "There is continuity of the taxpayer's interest in the corporate enterprise both by virtue of the stock and the 10-year bonds of the New York Company." In the instant case the petitioner's stockholders started the transaction as the owners of the $ 3.25 preferred stock and at the conclusion of the transaction were the owners of new $ 2.50 preferred stock and the half share of common stock in place of the old preferred stock previously held. The new preferred stock and the common shares were received as the consideration in a single transaction and there was continuity1942 U.S. Tax Ct. LEXIS 37">*63 of interest in the corporate enterprise (the petitioner) both by virtue of the new $ 2.50 preferred stock and the half shares of common stock. That the common stock so issued in partial exchange for the old preferred stock was also a dividend and so denominated by a resolution spread on the minutes of the petitioner is not of any moment. The half shares of common stock were none the less the shares of a corporation a party to the reorganization exchanged "in pursuance of the plan of reorganization * * * for stock * * * in such corporation," and under section 112 (b) (3), the income represented thereby is not to be recognized. See also Commissioner v. Food Industries, Inc., 101 Fed. (2d) 748; Commissioner v. Schoellkopf, 100 Fed. (2d) 415; and Commissioner v. Leary, 97 Fed. (2d) 1004, which involved exactly the same transaction as in Commissioner v. Kolb, supra, and in which both the Board of Tax Appeals and the courts reached the same conclusion. In Elizabeth Morainville, 46 B. T. A. 753, the issue and the facts1942 U.S. Tax Ct. LEXIS 37">*64 were substantially similar to the issue and facts in this case, and, since the reasoning and conclusions there are in conflict with the reasoning and conclusions here expressed, that case is accordingly overruled.

With respect to the cash distribution of $ 3,252 in 1936, the decision must be for the petitioner. Sec. 112 (c), Revenue Act of 1936. ⁷ As we have pointed out, the respondent has at no place contended that the petitioner did not have sufficient earnings and profits available for the distribution of a dividend in the amounts here claimed. Under section 112 (c) (2), it is provided that where a distribution is made 1 T.C. 59">*70 pursuant to a plan of reorganization "but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913." It thus appears that to the extent of the cash distributed there was the payment of a taxable dividend and the petitioner is entitled under section 27 (a), supra, to a dividends paid credit therefor. 1942 U.S. Tax Ct. LEXIS 37">*65

1942 U.S. Tax Ct. LEXIS 37">*66 It is the further contention of petitioner that regardless of the merits of the controversy herein the respondent is bound by his former ruling to the effect that the issuance of the common stock to the recipients of the new preferred stock did constitute payment of a taxable dividend and that the petitioner is therefore entitled to a dividends paid credit in respect thereof. The petitioner makes no claim that the determination herein was not made within the period of the statute of limitations, but argues that the respondent may not change his ruling of November 24, 1936, even though it was erroneous. The essential elements of estoppel are not here present and the statute plainly shows that the Commissioner not only may correct an erroneous ruling within the period of the statute of limitations, but is expected to do so. In that connection we need look no further than section 271⁸ of the statute, wherein Congress defines the term "deficiency."

1942 U.S. Tax Ct. LEXIS 37">*67 No evidence was offered with respect to the $ 5,000 deduction claimed by the petitioner for 1936 and described as reorganization expenses. Neither was any mention made of it in the petitioner's brief. We assume therefore that the issue has been abandoned and sustain the action of the respondent in disallowing the deduction.

Decisions will be entered under Rule 50.

Sternhagen, J., concurring only in the result: In my opinion, the decision in Elizabeth Morainville, 46 B. T. A. 753, should not be overruled, 1 T.C. 59">*71 for the facts in the two cases are different. The dividend of two shares in the Morainville case was separately and unconditionally declared to discharge the accumulated unpaid dividends on the preferred shares. There was no such ambigous attempt as in the present case to declare a dividend "in consideration of the exchange of" the old shares for new as an integral part of a statutory reorganization exchange. The Morainville dividend was not a part of the consideration in the exchange, but was payable as a dividend to all preferred shareholders in discharge of the arrears. It was received by the shareholders 1942 U.S. Tax Ct. LEXIS 37">*68 as a dividend, and was, I think, properly taxable to them as such, even though the corporation was contemporaneously issuing other shares in a recapitalization. The decision to that effect was in accord with the prior authorities.

There is no necessity for an all-embracing rule that a payment of dividends in arrears may not be recognized as such if it is made contemporaneously or in conjunction with a recapitalization or other statutory reorganization. As long as the evidence shows that the two things, the dividend and the exchange, were separately done and there is no circumstance requiring doubt of bona fides, I see no reason why they may not be recognized as separate, one as a dividend and the other as an exchange in reorganization, each with its separate tax effect. Either the shareholders are taxable on the dividends or the corporation gets no dividends paid credit, so the tax effect throws no great light on the motive or the legal character of the payment.

In the present case the alleged payment of the dividend is not clearly declared or treated as such, but is expressly stated and shown to be a factor in the reorganization exchange. The petitioner is, therefore, not 1942 U.S. Tax Ct. LEXIS 37">*69 in position to claim the dividends paid credit, for the receiving shareholders would, upon the same evidence, not be taxable upon the "dividends."