39 T.C. 423">*423 OPINION.

Respondent determined a deficiency in petitioner's income tax for the year 1957 in the amount of $ 10,498.07. Petitioner claims an overpayment of income tax for 1957 of $ 9,152.36. The issue for decision is whether expenses incurred by petitioner in paying stock dividends to its shareholders in 1957 are deductible.

All of the facts have been stipulated and are found accordingly.

General Bancshares Corporation (hereinafter referred to as petitioner) was incorporated under the laws of the State of Missouri in 1946 and has its principal place of business in St. Louis, Missouri. It filed its corporation income tax return for the year 1957 with the district director of internal revenue at St. Louis, Missouri.

Since its incorporation, petitioner has paid dividends on its common stock in common stock as follows:

39 T.C. 423">*424 During the year 1957 petitioner accrued and paid as expenses of issuing stock dividends a total amount1962 U.S. Tax Ct. LEXIS 22">*24 of $ 22,176.50 comprised of the following items:

These amounts, claimed as business expense deductions by petitioner on its income tax return for the year 1957, have been disallowed by respondent in his notice of deficiency.

During the year 1958 petitioner paid additional amounts which it had incurred in connection with issuance of stock dividends during 1957, which amounts were properly accruable as of December 31, 1957. These expenses were as follows:

Petitioner did not claim these amounts as 1962 U.S. Tax Ct. LEXIS 22">*25 deductions on its income tax return for the year 1957 but respondent in his notice of deficiency allowed $ 2,801.02 of these amounts as a deduction. Petitioner claims an overpayment of income tax for the year 1957 based on respondent's failure to allow as a deduction the remaining $ 15,612.80 of these amounts.

During 1957 petitioner's principal business activity was in the field of investment holding and finance. It held controlling amounts of the capital stock of a number of affiliated corporations in the insurance or banking fields and derived the major part of its income from dividends from these companies.

Petitioner's 1957 income tax return shows a charge to earned surplus of $ 174,736 for its corporate stock issued to its shareholders in 1957. Also shown on petitioner's 1957 income tax return is an increase in petitioner's common stock capital account for 1957 of $ 174,775 .

Neither party has cited, nor have we found, any case passing upon the deductibility by a corporation of expenses incurred by it in paying 39 T.C. 423">*425 a stock dividend. It appears, therefore, that the precise issue here presented is one of first impression. ¹

1962 U.S. Tax Ct. LEXIS 22">*26

Generally, expenses incurred by a corporation for its organization or in making subsequent changes in the amount of its capital stock are considered to be capital expenditures. Missouri-Kansas Pipe Line Co. v. Commissioner, 148 F.2d 460 (C.A. 3, 1945), affirming a Memorandum Opinion of this Court; Skenandoa Rayon Corporation, 42 B.T.A. 1287">42 B.T.A. 1287 (1940), affd. 122 F.2d 268 (C.A. 2, 1941), certiorari denied 314 U.S. 696">314 U.S. 696; Motion Pictures Capital Corporation, 32 B.T.A. 339">32 B.T.A. 339 (1935), affd. 80 F.2d 872 (C.A. 2, 1936); Firemen's Insurance Co., 30 B.T.A. 1004">30 B.T.A. 1004 (1934); Borg & Beck Co., 24 B.T.A. 995">24 B.T.A. 995 (1931); and Frischkorn Real Estate Co., 21 B.T.A. 965">21 B.T.A. 965 (1930).

In 24 B.T.A. 995">Borg & Beck Co., supra, the taxpayer in one year changed its capitalization from a total outstanding capital stock of $ 1 million divided into 200,000 shares of a par value of $ 5 per share, to 100,000 shares of no par value but of a declared1962 U.S. Tax Ct. LEXIS 22">*27 value of $ 10 per share. In the next year the taxpayer increased its authorized capital stock from 100,000 shares having no par value to 125,000 shares having no par value. Various stamp, filing, and printing fees and expenses were incurred with respect to each of these changes. We held these expenses to be capital expenditures which were not deductible since they were incurred in connection with a change in the capital structure of the corporation.

As petitioner points out, the stock dividends which it paid in 1957 were only 2 percent whereas the capital stock of the taxpayer in 24 B.T.A. 995">Borg & Beck Co., supra, was increased by 25 percent in the second year there involved. It would require almost 6 years of paying 2 percent semiannual stock dividends to effect a 25 percent increase in capital stock. However, the difference in this case and 24 B.T.A. 995">Borg & Beck Co., supra, is one of degree and not of kind. Petitioner's earned surplus account for 1957 was charged with the sum of $ 174,736, representing stock distributed to its shareholders, and its common stock capital account shows an increase for 1957 of $ 174,775. It appears that1962 U.S. Tax Ct. LEXIS 22">*28 this increase in petitioner's common stock capital account for 1957 represents the aggregate of the par value of petitioner's common stock 39 T.C. 423">*426 issued as stock dividends to its shareholders in that year. This sum, under Missouri law, ² is now dedicated to the business and cannot be paid out in dividends. The stock dividends have caused a change in petitioner's capital structure, even though no new capital was acquired. Cf. 24 B.T.A. 995">Borg & Beck Co., supra.For this reason we feel that the expenses involved in issuing the stock dividends are capital in nature and not deductible.

1962 U.S. Tax Ct. LEXIS 22">*29 Petitioner argues that a different view of a change in capital structure should be adopted for tax purposes than for purposes of State corporate law, since for the purposes of determining the taxability of subsequent cash dividends, accumulated earnings and profits are not reduced by transfer from the earned surplus to the capital stock account when a stock dividend is issued. This argument ignores the fact that the amount so transferred is under State law no longer available for payment of a cash dividend but has become a part of the corporate stated capital.

In support of its position, petitioner argues that the issuance of these 2-percent stock dividends merely maintains the capital structure of the business and the expenses incident thereto are analogous to those allowed to individuals under section 212 of the Internal Revenue Code of 1954; ³ that the expenses relate to "carrying on a trade or business" in that by issuing stock dividends petitioner can retain its funds thus improving its credit standing; that the expenses incurred do not build up any meaningful asset; and that under the philosophy of section 248 such expenses should be allowed as deductions.

1962 U.S. Tax Ct. LEXIS 22">*30 The issuance of stock dividends does not maintain the capital structure of the business but rather effects a definite change. It places 39 T.C. 423">*427 amounts into stated capital and thus unavailable for distribution as cash dividends, which otherwise might be distributed as cash dividends. If petitioner continues with semiannual 2-percent stock dividends over a number of years, the resulting change in its capital structure will be pronounced. Such a change is not comparable to replacement of parts necessary to keep some capital unit in operation. Cf. Libby & Blouin, Ltd., 4 B.T.A. 910">4 B.T.A. 910 (1926). Each issuance of new stock and the resulting change in capital structure are permanent and the effect is cumulative.

The capitalizing of earned surplus by petitioner may have improved its credit position, but even if this were the purpose of petitioner's change in its capital structure, the expenses of such change are not deductible as ordinary and necessary business expenses. Cf. Fishing Tackle Products Co., 27 T.C. 638">27 T.C. 638, 27 T.C. 638">645 (1957).

The fact that no meaningful or valuable asset is being built up by the expenses incurred in paying1962 U.S. Tax Ct. LEXIS 22">*31 a stock dividend does not ipso facto make such expenditures deductible. Sections 263 and 162 together are not all inclusive. Certain expenditures which are capital in nature but do not cause any increase in the value of an asset are not deductible as ordinary and necessary business expenses. See Baltimore & Ohio Railroad Co., 29 B.T.A. 368">29 B.T.A. 368 (1933), affd. 78 F.2d 460 (C.A 4, 1935); Holeproof Hosiery Co., 11 B.T.A. 547">11 B.T.A. 547 (1928); and First National Bank of St. Louis, 3 B.T.A. 807">3 B.T.A. 807 (1926).

Section 248 has not changed any of the earlier distinctions made between regular and capital expenses. The section merely permits deduction of corporate organizational expenditures which theretofore had been treated as capital expenses. In the absence of the application of section 248 or of any other statutory exception, the general rules relating to capital expenditures apply. Petitioner does not contend that section 248 or any other statutory exception applies to the expenditures here in issue.

Decision will be entered for respondent.