13 T.C. 1079">*1080 OPINION.

These consolidated proceedings involve income tax deficiencies determined by respondent against each petitioner, respectively, for the years and in the amounts, as follows:

1949 U.S. Tax Ct. LEXIS 4">*6 The proceeding of Spreckels-Rosekrans Investment Co., Docket No. 5677, also involves personal holding company surtax deficiencies of $ 555.73 for 1939 and $ 2,554.45 for 1940 and a declared value excess profits tax deficiency of $ 23.08 for 1940.

Overpayments are claimed as follows:

The two issues presented for our consideration are whether the respondent erred in determining:

(1) With regard to all four proceedings, that the distributions by the J. D. & A. B. Spreckels Co. to its stockholders in 1938, 1939, and 1940 constituted taxable dividends to the extent of 100 per cent thereof, and

(2) With regard to Docket No. 5678, that petitioner Alma Spreckels Rosekrans was taxable on the entire amount of a distribution of $ 32,500 received by her in 1938 from Spreckels-Rosekrans Investment Co., a personal holding company, upon her consent to include such amount in her gross income in connection with a claim by the corporation for 13 T.C. 1079">*1081 the benefit1949 U.S. Tax Ct. LEXIS 4">*7 of section 186 of the Revenue Act of 1942, when the amount of the dividend paid credit required to relieve the corporation from personal holding company surtax did not exceed $ 23,893.26.

At the hearing certain assignments of error were withdrawn as to three of the proceedings ¹ and certain other assignments of error were settled by the agreement of the parties in one proceeding. ²1949 U.S. Tax Ct. LEXIS 4">*8 In addition, certain assignments of error in two proceedings involve only a recomputation dependent upon the decision on the first issue. ³ Effect thereto will be given in the recomputations under Rule 50.

The proceedings have been submitted upon the pleadings, exhibits, a separate supplementary stipulation of facts in each proceeding, respectively, and, also, as applicable to all four proceedings, a primary stipulation of facts. The latter relates to the first issue, common to all four proceedings, and sets forth three stipulated issues upon which the common1949 U.S. Tax Ct. LEXIS 4">*9 issue is dependent and also contains various schedules and computations showing the results in the event of our decision in favor of petitioners or respondent on all or one or more of those stipulated issues. Such stipulations are included herein by reference as our findings of fact. We shall set forth only such facts as are deemed essential for the purposes of this opinion.

The petitioners herein are individuals, except for the Spreckels-Rosekrans Investment Co., a corporation organized under the laws of Nevada. Each petitioner's principal office is 2 Pine Street, San Francisco, California, and each petitioner's tax returns for the years involved were filed with the collector for the first district of California. As to the petitioners' claiming overpayments, the facts relative to the filing of returns, the payment of income taxes, and the filing of claims for refund are set forth in the margin. ⁴

1949 U.S. Tax Ct. LEXIS 4">*10 13 T.C. 1079">*1082 Issue 1 (involved in all four proceedings). -- During 1938, 1939, and 1940 the J. D. & A. B. Spreckels Co., a California corporation, hereinafter referred to as the Spreckels Co., had 20,000 shares of capital stock outstanding. The supplementary stipulation filed in each proceeding sets forth in detail for the years 1938, 1939, and 1940, or for the two or more of those years involved in each particular proceeding, the amounts received by the petitioner as distributions on shares of the capital stock of the Spreckels Co. and on account of the petitioner being the direct owner of such shares and/or being the beneficiary of a trust holding such shares on which the distributions received by the trustee (after deducting certain charges and expenses of the trust) were currently distributable to the beneficiaries of the trust. It is stipulated that the basis of each and every share of Spreckels Co. stock to each petitioner herein is in excess of the possible maximum capital distribution per share for the years involved. It is further stipulated that the amounts received by each petitioner as Spreckels Co. distributions which constitute taxable dividends shall be determined1949 U.S. Tax Ct. LEXIS 4">*11 by this Court's decision in the proceeding of Grace H. Kelham, Docket No. 5333, and the facts and schedules set out in the primary "Stipulation of Facts re: Dividend Issue" filed in these proceedings and identical with such stipulation filed in the Grace H. Kelham proceeding.

On the first issue, we hold, pursuant to stipulation of the parties, that in all four proceedings the extent to which the Spreckels Co.'s distributions to petitioners in the taxable years constituted taxable dividends will be determined, under Rule 50, in accordance with this Court's opinion in the case of , and the appropriate stipulated schedules used in the recomputation pursuant to the opinion in that case.

13 T.C. 1079">*1083 Issue 2 (involved only in Docket No. 5678). -- During the years 1938, 1939, and 1940 the Spreckels-Rosekrans Investment Co., hereinafter referred to as the Investment Co., owned 1,125 shares of the capital stock of the Spreckels Co. and received distributions from the latter in the amounts of $ 47,812.50 during 1938, $ 61,875 during 1939, and $ 76,500 during 1940.

During the years 1938, 1939, and 1940 petitioner Alma Spreckels1949 U.S. Tax Ct. LEXIS 4">*12 Rosekrans owned all the outstanding capital stock of the Investment Co. and as its sole stockholder received distributions in the amounts of $ 32,500 during 1938, $ 37,950 during 1939, and $ 44,400 during 1940. During the year 1938 the Investment Co. was a personal holding company. On January 1, 1938, 1939, and 1940, the Investment Co. had no earnings or profits accumulated since March 1, 1913. For the year 1938 the Investment Co., by reason of capital losses sustained, had no earnings or profits, and its distribution of $ 32,500 in that year was made from paid-in surplus. As to the years 1939 and 1940, if all distributions received by Investment Co. from Spreckels Co. constituted distributions from Spreckels Co.'s earnings and profits available for dividends, then Investment Co.'s adjusted net income amounted to $ 39,789.77 for 1939 and $ 48,913.59 for 1940, which amounts are in excess of Investment Co.'s distributions to Alma Spreckels Rosekrans for each of those years, respectively. However, the extent to which Spreckels Co.'s distributions for 1939 and 1940 constituted taxable dividends will be redetermined under the first issue herein and the effect thereof on the income1949 U.S. Tax Ct. LEXIS 4">*13 of Investment Co. and its distributions to Alma Spreckels Rosekrans will be given in the recomputation under Rule 50.

For the year 1938 the Investment Co.'s above mentioned capital losses were in excess of the allowable deduction therefor and that company was subject to and paid income tax and personal holding company surtax for 1938. Respondent, by treating all distributions received by Investment Co. from Spreckels Co. as distributions from the latter's earnings or profits available for dividends, determined that Investment Co. had Title 1A net income of $ 24,893.26 for 1938 and that it was entitled to a deduction therefrom of $ 1,000 paid on indebtedness, leaving a base of $ 23,893.26 for calculating its personal holding company surtax for 1938. In 1943 the Investment Co. filed a claim for relief as to the 1938 personal holding company surtax under the benefit of the applicable retroactive provisions of section 186 of the Revenue Act of 1942. In connection with the filing of such claim and as a condition to the allowance thereof the respondent, over petitioner's protest, required that Alma Spreckels Rosekrans consent to the inclusion in her 1938 income, as a taxable dividend, 1949 U.S. Tax Ct. LEXIS 4">*14 of the full amount of Investment Co.'s distribution of $ 32,500 to her in that year, although 13 T.C. 1079">*1084 a distribution in the lesser amount of $ 23,893.26 would have been sufficient to have relieved the Investment Co. from liability for personal holding company surtax for 1938.

The second issue is whether the respondent erred in including in the gross income of petitioner Alma Spreckels Rosekrans, as a taxable dividend, the entire $ 32,500 distributed to her by the Investment Co.

Petitioner contends that the amount to be included (under her executed consent) should not be the full $ 32,500, but only the amount of $ 23,893.26 which would have been sufficient (as a dividends paid credit) to have relieved the Investment Co. from liability for personal holding company surtax for 1938.

We think that the entire amount of the $ 32,500 distribution, as determined by respondent, is includible in Alma Spreckels Rosekrans' gross income as a taxable dividend for 1938.

Under section 115 (a) of the Revenue Act of 1938, ⁵1949 U.S. Tax Ct. LEXIS 4">*16 prior to its amendment by section 186 (a) (2) of the Revenue Act of 1942, ⁶ the distribution of $ 32,500, having been made from paid-in surplus, was not a taxable dividend -- 1949 U.S. Tax Ct. LEXIS 4">*15 that is to say, such distribution was not "(1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year." However, the amendment of section 115 (a), supra, by section 186 (a) (2), supra, added to the definition of dividends in section 115 (a) a new sentence, embracing distributions without regard to earnings, that sentence being in material part: "Such term [dividend] also means any distribution to its shareholders * * * made by a corporation which, under the law applicable to the taxable year in which the distribution is made, is a personal holding company." (Emphasis supplied.)

Section 186 (a) (2), supra, was made retroactive by section 186 (f); but section 186 (a) (2), supra, would not apply unless the provisions 13 T.C. 1079">*1085 of section 186 (g) of the Revenue Act of 1942 ⁷ were complied with, namely, and in so far as material here, (1) by the filing of the corporation's claim for relief on account of its 1938 distribution, and (2) the filing of a consent 1949 U.S. Tax Ct. LEXIS 4">*17 by the shareholder "agreeing to the inclusion of the amount of such distribution to him in his gross income as a taxable dividend."

1949 U.S. Tax Ct. LEXIS 4">*18 In the instant case compliance was made with the provisions of section 186 (g), supra, and thereby section 115 (a) of the 1938 Act as amended by section 186 (a) (2) of the 1942 Act, supra, became operative, so that the entire $ 32,500 distribution to Alma Spreckels Rosekrans in 1938 became embraced in the definition of a dividend and, accordingly, taxable as such to her.

On this second issue, the respondent's determination is sustained.

Decision in each proceeding will be entered under Rule 50.