1945 U.S. Tax Ct. LEXIS 213">*213
1. Where the record indicates that the intention of a corporation in purchasing shares of its stock owned by petitioner was to cancel and retire it, the amount received by him constitutes a distribution in partial liquidation and is taxable as such.
2. In 1924 petitioner, the owner of common stock of a corporation, received 50 shares of the same class of stock as a stock dividend. In 1932, when 41 of the stock dividend shares were retired at par, he reported the amount received as an ordinary dividend and paid tax thereon at surtax rates only. In 1940, in computing the gain realized upon the retirement of the remainder of the stock for cash, he allocated no part of the basis of the old stock to the shares retired in 1932.
(a) Under the provisions of subparagraph (A) of
(b) The failure of the Commissioner to make any change in petitioner's method of reporting the amount he received in connection with the retirement of 41 of the stock dividend shares in 1932 did not bring the transaction1945 U.S. Tax Ct. LEXIS 213">*214 within the provisions of subparagraph (D) of
4 T.C. 854">*855 OPINION.
Petitioner contests a deficiency in income tax for the calendar year 1940 in1945 U.S. Tax Ct. LEXIS 213">*215 the amount of $ 3,652.28. Two questions are raised. The first is whether the gain realized by petitioner from the disposition of some shares of corporate stock is taxable under
The facts have been stipulated and are found accordingly. Summarizing those applicable to the first issue petitioner, an individual residing at Omaha, Nebraska, and filing his income tax return with the collector for the district of Nebraska, had for some time been secretary of the Billings Dental Supply Co., hereinafter referred to as Billings. He resigned that office on October 21, 1940.
Various blocks of stock in Billings had been purchased by petitioner between 1915 and 1936 and additional stock had been acquired as stock dividends, as shown in paragraph four of the stipulation. On January 2, 1940, petitioner was the owner of 367 shares of the par value of $ 100 each. On that date he surrendered 36 shares to Billings and received $ 3,600. Upon brief he concedes1945 U.S. Tax Ct. LEXIS 213">*216 that that amount was received as "a distribution in liquidation as ruled by the Commissioner in his ninety day letter." In addition to the 36 shares acquired from petitioner, Billings at the same time acquired 264 additional shares from other stockholders and on January 2, 1940, reduced its outstanding shares from 3,150 to 2,850. 1 This reduction of capital stock was not ratable among all stockholders.
On October 17, 1940, Billings entered into a contract to sell its supply business to the S. S. White Dental Co. After the sale the name was changed to Billings Dental Laboratory and the company continued in business under that name, operating dental laboratories in Omaha and Lincoln, Nebraska.
Due to the contemplated sale of the supply business of Billings, petitioner desired to withdraw from active participation in the 1945 U.S. Tax Ct. LEXIS 213">*217 affairs of the corporation and to dispose of his stock. On October 21, 1940, 4 T.C. 854">*856 he and several other stockholders, collectively owning 486 shares of Billings stock, agreed in writing to:
* * * sell all his stock in said company to B. Park Billings, President and Agent for Billings Dental Supply Company for the price of One Hundred Ten and no 100ths ($ 110.00) Dollars per share and each agrees to deliver to vendee his certificate or certificates of stock for said number of shares in said corporation.
It was agreed that payment for the stock would be made "on or before November 20, 1940, in cash."
The 331 shares of stock owned by petitioner were turned in to the corporation in accordance with the terms of the agreement and canceled by it. Of the 155 shares turned in to the corporation by other stockholders at the same time, 80 were canceled and 75 were reissued to two stockholders.
On November 7, 1940, Billings gave notice of a special meeting of stockholders to be held November 14, 1940, for the following purposes,
* * * In general to carry out the terms of the contract entered into by the directors of the company with the S. S. White Dental Manufacturing Co. dated October 17, 1940, and to do all things necessary for the corporation to do in making said sale and changes in the business and to retire a portion of the capital stock of the company.
On November 14, 1940, pursuant to the foregoing notice, a meeting of stockholders was held. The minutes state that 486 shares of stock were purchased from various stockholders on October 21, 1940, 75 of which had been reissued to two named stockholders. The concluding sentence of the minutes is as follows:
* * * The President then announced the purchase of 486 shares of the Company's stock at the price of $ 110.00 per share, which had been authorized by the Directors of the Company on October 19, 1940, that the sale had been completed and all the stock had been delivered to the Company and retired. Upon motion by A. S. Billings, duly seconded, the purchase and retirement of this stock was approved.
In1945 U.S. Tax Ct. LEXIS 213">*219 support of his contention that a sale was made and that section 117 is applicable, petitioner points to the fact that the words "sale" and "purchase" were used in the written contracts between the parties and in the minutes of the meetings of the board of directors and stockholders of Billings. Counsel argues that so far as petitioner was concerned he made a sale of his stock; that he "did not care and did not know what the purchaser would do with the 331 shares"; that he was not a party to the ultimate retirement of the stock; and that 4 T.C. 854">*857 whatever the purchaser did with it should not enter into the treatment of the transaction for tax purposes.
The use by the parties of the terms "purchase" and "sale" does not determine the character of the transaction.
There is no evidence in the instant case that the stock was purchased to be held in the treasury or to be reissued. The stipulated facts indicate the contrary. Thus the provision in the contract for deferring payment 30 days indicates that the corporation did not intend to1945 U.S. Tax Ct. LEXIS 213">*222 make payment until, as actually eventuated, the stock had been canceled and retired and appropriate action had been taken to approve such disposition of it. Nor could it be found on this record -- 4 T.C. 854">*858 if important -- that petitioner did not know that this was precisely what the corporation intended to do. The sequence of events shows that the sale of a portion of the assets had been made by Billings to the S. S. White Dental Co. on October 17, 1940. Two days later and due to that sale Billings contracted to acquire petitioner's stock. At that time he was secretary of the company. It is reasonable to suppose that he knew all about the details of the sale and the action contemplated in connection with the reorganization. In any event the parties have not stipulated he did not know. The stipulation was specifically made "subject to the right of either party to introduce evidence of other facts not inconsistent" with the facts stipulated; but petitioner did not testify. Under the circumstances, therefore, it can not be found as a fact that petitioner did not know that his stock was being acquired by Billings for the purpose of being canceled or retired.
The character of 1945 U.S. Tax Ct. LEXIS 213">*223 the transaction must be judged by all of the surrounding facts and circumstances. In our opinion those present here show that there was a partial liquidation of Billings during the fall of 1940. It follows that the respondent did not err in taxing petitioner's gain under
The difference between the parties as to the basis of the stock stems from the acquisition by petitioner of 50 shares of Billings stock in 1924 as a stock dividend (common upon common) and the sale in 1932 of 41 of the shares thus acquired. Upon the acquisition of the stock in 1924 the basis of the 325 shares then owned by petitioner, under article 1599 of Regulations 65, was as follows:
| Shares | Old basis | Total | New basis | Total |
| 201.096 | 73.10 | $ 14,700 | 60.92 | $ 12,250.22 |
| 23.484 | 87.72 | 2,060 | 73.10 | 1,716.68 |
| 25.42 | 100.00 | 2,542 | 83.33 | 2,118.25 |
| 25 | Purchased 2-18-24 at $ 100 | 2,500.00 | ||
| 50 | Stock dividend | 3,216.85 | ||
| Total | 21,802.00 | |||
By reason of later purchases, additional stock dividends, and the application of a similar regulation under later revenue acts, the basis of 41 of the stock dividend shares sold in 1932 had become $ 2,149.17. The 41 shares1945 U.S. Tax Ct. LEXIS 213">*224 were retired by the company at par in 1932 and petitioner reported the amount received ($ 4,100) as an ordinary dividend in his return of income for that year. Tax thereon was paid at surtax rates only. The parties have now stipulated that if he had reported the gain as ordinary taxable income, using as the cost of the shares their proper basis ($ 2,149.17) he would have been liable for an additional tax of $ 92.81.
4 T.C. 854">*859 The materiality of the last portion of the preceding paragraph is not readily apparent. Respondent, in our judgment, was clearly correct in using, as the basis of the 367 shares retired in 1940, their cost as shown in paragraph 4 of the stipulation, i. e., $ 22,536.16. Petitioner insists he is entitled to use as a basis $ 24,685.33 or $ 67.262 per share rather than $ 61.406 per share, as determined by respondent. The difference between the two amounts is $ 2,149.17 and represents the cost of the 41 shares sold in 1932. We know of no method or rule of law by or under which the basis of stock sold in an earlier year may become a part of stock retained. However, we shall consider more fully the argument of the parties.
On brief petitioner states that he reported1945 U.S. Tax Ct. LEXIS 213">*225 the receipt of the $ 4,100 in his income tax return for 1932 under the provisions of
(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 so 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.
(A) If the property was acquired by a shareholder in a corporation and consists of stock in such corporation, or rights to acquire such stock, acquired by him after February 28, 1913, in a distribution by such corporation (hereinafter in this paragraph called "new stock"), or consists of stock in respect of which such distribution was made (hereinafter in this paragraph called "old 1945 U.S. Tax Ct. LEXIS 213">*226 stock") and (i) the new stock was acquired in a taxable year beginning before January 1, 1936; or (ii) * * *
* * * *
(D) Subparagraph (A) shall not apply if the new stock or the old stock was sold or otherwise disposed of in a taxable year beginning prior to January 1, 1936, and the basis (determined by a decision of a court or the Board of Tax Appeals, or a closing agreement, and the decision or agreement became final before the ninetieth day after the date of the enactment of the Revenue Act of 1939) for determining gain or loss on such sale or other disposition was ascertained by a method other than that of allocation of the basis of the old stock.
Respondent contends that the $ 4,100 received by petitioner in 1932 upon the redemption and retirement of the 41 shares theretofore 4 T.C. 854">*860 received by him as a stock dividend constituted a distribution1945 U.S. Tax Ct. LEXIS 213">*227 in partial liquidation 2 and that the gain resulting therefrom should have been reported in that year as ordinary taxable income. He also contends that in any event the cost to petitioner of these 41 shares was properly eliminated under the provisions of subparagraph (A) of
1945 U.S. Tax Ct. LEXIS 213">*228 Petitioner urges that while subparagraph (D) of
* * * the basis for determining gain or loss with respect to the remaining shares shall be fixed in a manner consistent with the prior determination to the end that, the sale or other disposition of all lots being considered, the taxpayer will have effected ultimately a tax-free recovery of the total cost or other basis of his original shares, and no more.
It may not be amiss to discuss briefly the events which prompted Congress to enact
The purpose of the enactment of
The question raised by the contentions of the parties is whether the general rule provided for in subparagraph (A), or the exception to the general rule contained in subparagraph (D), should be applied. The shares in issue had been acquired as a dividend after February 28, 1913, and in a taxable year beginning before January 1, 1936. Subparagraph (A) is therefore applicable and the basis1945 U.S. Tax Ct. LEXIS 213">*231 of the new dividend stock and of the old stock must be determined by allocating between the old and the new stock the adjusted basis of the old stock, unless, as petitioner urges, the basis for the shares disposed of in 1932 had been determined by a decision of a court, or the Board of Tax Appeals (now Tax Court), or a closing agreement, by a method other than that of allocation of the basis of the old stock, in which event the exception contained in subparagraph (D) would apply.
There has been no determination by any of the tribunals mentioned in subparagraph (D) or by a closing agreement justifying a departure from the allocation of basis method in the instant case. We can not stretch the wording of the statute, as petitioner apparently would have us do, to include an instance where no closing agreement was ever entered into between the petitioner and the Commissioner with respect to petitioner's method of reporting the redemption of the 41 shares in 1932. Moreover, we do not have here an instance where 4 T.C. 854">*862 petitioner is being deprived of his right to recover tax-free his original cost by reason of regulations misinterpreting the law or judicial decisions effecting detrimental1945 U.S. Tax Ct. LEXIS 213">*232 changes in regulations, or a closing agreement. The law and regulations requiring allocation of basis between old stock and dividend stock of the same class did not change between 1924 and 1940, and the receipt by petitioner of the dividend stock in 1924 had the effect of apportioning what had been the cost of the shares theretofore owned by him proportionately among those shares and the new dividend stock.
As indicated at the outset of the discussion, we are of the opinion that the Commissioner used the correct basis for the stock in determining the gain realized by petitioner upon its retirement. Cf.
1. Paragraph nine of the stipulation states that the outstanding shares were reduced from $ 3,150 to $ 2,850. The context indicates and we have concluded that the dollar sign was erroneously used.↩
2.
"(c) Distributions in Liquidation. -- 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 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) 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 subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
* * * *
"(h) Definition of Partial Liquidation. -- As used in this section the term 'amounts distributed in partial liquidation' means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock."↩
