Lamberth v. Commissioner

ALLEN H. LAMBERTH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SUDA J. LAMBERTH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lamberth v. Commissioner

Docket Nos. 95305, 95306.

United States Board of Tax Appeals

42 B.T.A. 438 ; 1940 BTA LEXIS 1000 ;

July 31, 1940 , Promulgated

*1000 Petitioners were holders of class B common stock of the X corporation. On July 19, 1930, the directors of X resolved that a stock dividend payable in preferred stock of X be declared on its class B common stock payable July 31, or, alternatively, a cash dividend in a like amount to those holders of class B common stock who filed, on or before July 21, an election to receive dividends in cash. Petitioners filed no such election and received their dividend in preferred stock. In 1933 petitioners sold part of this preferred stock to the X corporation. Held, petitioners acquired this stock as a stock dividend, its basis to them was zero, and all of the proceeds derived by them in 1933 from its disposition were taxable to them. Helvering v. Gowran, 302 U.S. 238 .

Joseph D. Brady, Esq., and Ray J. Coleman, Esq., for the petitioners.

E. A. Tonjes, Esq., for the respondent.

KERN

*439 Each of these proceedings, consolidated for hearing and decision, involves a deficiency in petitioners' income tax liability for the year 1933 determined by respondent in the sum of $294.98, by reason of his including in petitioners' taxable *1001 income the sum of $2,050, which amount was received by petitioners during the taxable year in connection with the retirement of certain preferred stock distributed to them in a prior year by way of a dividend. By amended answers filed herein respondent asserted a deficiency in a smaller amount, to wit, $88.74, treating the amount so received as a capital gain derived from the sale of stock. Petitioners contend that the dividends involved herein were taxable in the year in which received and not in the taxable year. Petitioners ask that we determine an overpayment of taxes by them in the taxable year. Their claims for refund were based on a contention that the basis for determination of gain or loss from the sale or disposition of this stock was such that a loss resulted to them from its disposition by them in the taxable year.

FINDINGS OF FACT.

Petitioners are husband and wife, domiciled in Los Angeles, California. Petitioners filed separate Federal income tax returns for the calendar year 1933, which were identical in all respects. Each return showed a tax liability of $7,181.96, which was paid in four equal quarterly installments of $1,795.49 each on March 15, June 13, *1002 September 6, and December 11, 1934. In schedule C attached to each of said returns there was reported as "capital net gain" in item 30 one-half of a gain computed at $2,680.17 from "retirement of 41 shares of preferred stock" of Interstate Cotton Industries, Inc., owned as community property. The amount received by the marital community upon the retirement of the 41 shares in 1933 was their par value of $4,100. Each return showed in item 35 a tax of $167.51 at the capital gain rate of 12 1/2%.

In deficiency notices dated June 27, 1938, the Commissioner asserted deficiencies of $294.98 in income tax for the taxable year 1933 against each of the petitioners. The Commissioner ruled that the retirement of the 41 shares of preferred stock was not subject to section 101 of the Revenue Act of 1932, but was a transaction within the provisions of section 115(g). Accordingly, the Commissioner eliminated the capital gain tax of $167.51 shown on the returns and added the sum of $2,050 to the dividend income of each of the petitioners. On November 2, 1936, each of the petitioners filed with the collector at Los Angeles a claim for refund of 1933 income tax in the amount of $285.93, such *1003 claim being predicated on the ground therein stated that the basis for determination of gain or loss from the sale or other disposition of the 41 shares of preferred stock involved herein was $146.214 per share, or $5,994.77, and that a capital net loss of *440 $1,984.77 was sustained from the disposition of the 41 shares. The cancellation or redemption of the 41 shares was not at such time and in such manner as to make distribution and cancellation or redemption thereof in whole or in part essentially equivalent to the distribution of a taxable dividend.

The 41 shares of preferred stock above referred to were acquired as follows:

On July 19, 1930, petitioners owned as community property 3,334 shares of class B optional dividend series common stock (hereinafter referred to as class B common) of Interstate Cotton Industries, Inc., a Delaware corporation. The certificate of incorporation of the corporation as of July 19, 1930, provided that all dividends declared upon class B common stock should be paid by the issue of preferred stock of the corporation unless the holder of any share or shares of such stock should elect to receive any such dividend in cash and should notify *1004 the corporation of that election, in accordance with the requirement of the bylaws, in which event the dividend on such shares should be payable in cash.

On July 19, 1930, the board of directors of the corporation declared dividends out of the earned surplus of the company payable July 31, 1930, by resolution reading in material part as follows:

RESOLVED: That a dividend is hereby declared out of the earned surplus of this company on the outstanding common stock of the company payable July 31, 1930, to holders of said stock of record on the books of the company at the close of business on July 21st, 1930, as follows:

FIRST: That a cash dividend of $31.50 per share is declared on the outstanding shares of Class A common stock.

SECOND: That a stock dividend of $31.50 payment in the Preferred stock of the company to be issued out of the authorized unissued shares of Preferred stock accruing from July 31, 1930, is declaed on each share of Class B Optional Dividend Series common stock in respect of which the record holder at the close of business of July 21, 1930, shall not have filed on or before said date an election to receive dividends thereon in cash, and

THIRD: A cash *1005 dividend of $31.50 on each outstanding share of Class B Optional Dividend Series common stock in respect of which the record holder at the close of business of July 21, 1930, shall have filed on or before said date an election to receive dividends in cash; and

BE IT FURTHER RESOLVED: That the Secretary of the Company be instructed to give immediate notice to all holders of Class B Common stock by delivering written notice in person or obtaining from him his written statement as to his election in exercising his option as hereinabove set forth. * * *

The petitioners, as owners of 3,334 shares of class B common, did not notify the corporation of any election to receive the dividend in cash. The petitioners therefore received $1,050.21 shares of preferred stock from the corporation on July 31, 1930, and on the same date petitioners purchased an additional 79/100 of a share from the corporation *441 for cash in the amount of $79. The 41 shares retired in 1933 were a part of the 1,051 shares thus acquired on July 31, 1930.

Consolidated balance sheets of Interstate Cotton Industries, Inc., as of June 30, 1930, and as of July 31, 1930, and a schedule showing detail of changes *1006 in surplus for the month of July 1930 were attached to the agreed statement of facts herein as, respectively, exhibits, C.D, and E, and they show cash in banks and on hand of $151,518.81 and surplus of $464,088.70 as of June 30, 1930; cash of $367,218.66 and a surplus of $31,281.30 as of July 31, 1930; receipt by Interstate Cotton Industries, Inc., during the month of July 1930 of dividends from its subsidiaries of $534,460, and payment of dividends to its stockholders of $525,105, which latter figure includes $147,105 representing dividends paid July 31, 1930, on class B common.

On June 30, 1932, all of the stockholders of Interstate Cotton Industries, Inc., entered into an agreement in writing under which common stockholders $1contributed per share in cash to the company and preferred stockholders contributed proportionately by surrender of preferred stock, cancellation of obligations, and payment of cash, and under which petitioners surrendered 332 shares of preferred stock which were a portion of the 1,051 shares acquired by them on July 31, 1930, as aforesaid. Immediately after the surrender of the 332 shares the petitioners were the owners of 719 shares of preferred stock, *1007 of which the 41 shares involved in this proceeding were a part and were owned and held by the taxpayers continuously from July 31, 1930, to July 31, 1933. In addition to the 332 shares surrendered as aforesaid, petitioners as preferred stockholders also contributed $27.88 in cash.

The contributions of the preferred stockholders, as such amounted to $1,185,581.06, and those of common stockholders, as such, amounted to $17,000. The contributions of the preferred stockholders were strictly pro rata according to their holdings of preferred stock; and the contributions of holders of common stock, both class A and class B, were $1 per share of such stock. Four individuals, owning a total of 1,190 shares of class B common stock, but no shares of preferred, contributed $1,190 in cash.

At a special meeting of the board of directors, duly called and held on June 12, 1933, the following resolutions were adopted:

BE IT RESOLVED that this corporation purchase at par, One Hundred Dollars ($100.00) per share, for the purpose of retirement and shares so purchased to have the status of authorized but unissued shares, pursuant to Section 27 of the General Corporation Law of the State of Delaware, *1008 2,122 shares of its preferred stock, said purchase to be made with its capital assets, it appearing that the assets of the corporation remaining after said purchase will be sufficient to pay any debts of the corporation, the payment of which has not been otherwise provided for, and

*442 BE IT FURTHER RESOLVED, that the President or Vice-President and the Secretary or Assistant Secretary of this corporation be, and they hereby are authorized, empowered and instructed to make the purchase of shares hereinbefore provided for, and

BE IT FURTHER RESOLVED, that said officers be, and they hereby are authorized, empowered, and instructed to execute, deliver, file and record any and all certificates that may be required by law to effectuate the retirement of such stock under Section 27 of the General Corporation Law of the State of Delaware.

Pursuant to an offer made by Interstate Cotton Industries, Inc., in accordance with said resolutions, petitioners on July 31, 1933, sold and surrendered to the corporation certificates representing 41 shares of its preferred stock and received therefor the sum of $4,000 in cash. These 41 shares were a portion of the 1,051 shares acquired *1009 on July 31, 1930, as aforesaid, and it is this $4,100 which the Commissioner, in determining the deficiencies, treated as a taxable dividend under the provisions of section 115(g) of the Revenue Act of 1932.

Interstate Cotton Industries, Inc., on July 31, 1930, had a cash fund available with which to pay the sum of $147,105 to class B common stockholders (if they had elected to take the dividend in cash) consisting of $659,524.58 cash in the bank standing in the name of Anderson, Clayton & Co. Anderson, Clayton & Co. acted, in fact, as banker for Interstate Cotton Industries, Inc., and the petitioner, Allen H. Lamberth, had a power of attorney authorizing him to draw cash from that fund in any amount required.

The fair market value of the preferred stock of Interstate Cotton Industries, Inc., on July 31, 1930, was $100 per share.

There was no understanding or agreement between petitioners and the corporation or any other person or persons prior to or between July 19 and July 21, 1930, that the petitioners or any other holders of class B common stock of the corporation would receive stock rather than cash, or cash rather than stock, in payment of the dividend payable on July 31, 1930, by *1010 the corporation upon class B common.

OPINION.

KERN: The basic question to be decided by us in these proceedings is whether the dividend declared by Interstate Cotton Industries, Inc., by the resolution of its board of directors of July 19, 1930, and paid pursuant thereto by the distribution to petitioners of the company's preferred stock, is to be considered by us as a stock dividend or as a cash dividend.

If it was a stock dividend, then the basis for determining gain or loss would be zero and all of the proceeds derived by petitioners from their disposition of the stock in the taxable year would be taxable to then under the rule of . *443 Pursuant to respondent's later determination, set out in his amended answer, the proceeds would be taxable as a capital gain.

If, as petitioners contend, the transaction should be considered as a constructive receipt by them of cash as a dividend and then a reinvestment of such cash in the stock acquired, then it must be treated as a cash dividend, taxable in the year in which received, and the basis of the stock for determining gain or loss would be the amount of cash constructively *1011 received and reinvested in the stock. In support of this contention, petitioners cite ; ; ; ; 11 Tax Cases, 181; ; ; ; ; and .

We do not consider any of the cases cited by petitioners to be applicable to the facts present in the instant proceedings. In most of them there was the declaration of a cash dividend with an unlimited option to the stockholders to take either cash or stock. In some there was an actual credit entered in the books of the corporation to the accounts of stockholders in amounts later used for the purchase of stock. It is unnecessary to set out the facts involved in each of these cases; it is sufficient to say that in none of them was there a declaration of a stock dividend with a proviso *1012 that if a stockholder gave appropriate notice some days prior to the date set for the distribution of the dividend he might then and on condition of making such election be entitled to cash in lieu of stock, as was, in effect, provided by the resolution of the board of directors of the corporation in the instant proceedings dated July 19, 1930, which is set out in full in our findings. Petitioners did not give notice pursuant to paragraph three of the resolution by July 21 that they elected to receive dividends in cash. After that date they were, therefore, entitled only to a stock dividend, and on July 31 stock was distributed to them pursuant to the second paragraph of the resolution, which provided for a stock dividend.

Until and unless petitioners made an election on or before July 21 to receive cash, they were only entitled by the terms of the resolution of July 19 to receive a stock dividend on July 31. They made no such election. Therefore, on July 31, when the dividend was to be distributed, they could receive only a stock dividend and this they did receive.

Therefore, we conclude that the dividend was not taxable to petitioners in 1930, *1013 ; and, further, that the proceeds from the disposition in 1933 of the stock received *444 by them as dividends in 1930 were taxable to petitioners under the authority of

We also conclude under the authority of the latter case that the basis of the stock in the hands of petitioners for determining gain or loss upon its disposition was zero. It follows that all of the proceeds derived by petitioners from its disposition are taxable as capital gain.

Petitioners urge that if we hold, as we have held, on this basic issue, then we must necessarily question the constitutionality of section 115(f)(2) of the Revenue Act of 1936. With this contention we do not agree. However, the question of the constitutionality of that section is not before us in these proceedings.

It is not necessary for us to consider the issue of estoppel raised by respondent.

Decision will be entered under Rule 50.