majority">

*785OPINION.

Smith :

The controversy here arises with respect to the base to be used in computing the petitioner’s profit or loss upon the sale of the 200 shares of stock of the Joseph Dixon Crucible Co. in 1924. The petitioner had purchased the stock prior to March 1, 1913, and it *786had a fair market value at that date of $312.50 per share. In 1914 the Joseph Dixon Crucible Co. declared a dividend of 100 per cent. In 1920 it declared another dividend of 150 per cent, which the petitioner and the respondent agree was a stock dividend which served to reduce the base to $125 per share. The question now arises as to whether the 100 per cent dividend declared and paid by the corporation in 1914, under the circumstances above described, was a cash dividend or a stock dividend which served to further reduce the base to $62.50 per share.

In support of his position that the 1914 dividend was a stock dividend, the respondent, in his brief, relies upon Eisner v. Macomber, 252 U. S. 189; United States v. Mellon, 281 Fed. 645; United States v. Davison, 1 Fed. (2d) 465; affd., 9 Fed. (2d) 1022; certiorari denied April 26, 1926; and certain decisions of the Board. The petitioner in his brief cites W. J. Hunt, 5 B. T. A. 356, and J. E. Brading, 17 B. T. A. 436.

None of these cases can be considered as controlling in this proceeding, however, for the reason that the question presented, viz., whether the distribution made by the Joseph Dixon Crucible Co. in 1914 was, with respect to the petitioner’s participation, a stock dividend or a cash dividend, is one of fact to be determined upon the evidence before us. W. J. Hunt, supra.

The facts here differ materially from those found in either the Hwnt case or the Brading case, For instance, in the Hunt case the stockholders had agreed, independently of any corporate action, prior to the declaration of the dividend that they would pay back into the company a part of the proceeds of the dividend by a simultaneous exchange of checks. In the instant case, the company by corporate action and as a part of the same resolution authorizing the declaration of the dividend made it a condition precedent thereto that at least 90 per cent of the stockholders would subscribe for new stock to the par value oí their present holdings and the equivalent of their pro rata parts of the proposed 100 per cent dividend. In our opinion in the Hwnt case we said:

In this case, even if it be conceded that the individual members of the board of directors could have legally bound the corporation, it is not alleged by any witness that the agreement referred to was other than an agreement between the stockholders, those who were to receive the dividends, and it related to what they would do with their dividends and not to the manner in which the corporation would distribute the dividends. There is no evidence that the directors as such undertook to act for the corporation. The resolution declaring the dividend did not recognize any such agreement as having been made. It is true that the corporation may have acted and very likely did act upon the assumption that the stockholders, in accordance with the agreement among themselves, would purchase stock with their dividends, but this is not sufficient to change what was declared by the corporation to be a cash dividend to a stock dividend. The stockholders were not legally bound to take stock.

*787In the Brading case, the corporation in 1920, pursuant to a resolution of the stockholders, increased its capital stock 100 per cent and issued to each of the four stockholders his proportionate part of the new stock. The shares of stock were charged in the company’s books to each stockholder and the indebtedness was “ to be liquidated by dividends now due and hereafter to become due-, or in such manner as the Board may hereafter direct.” We held under those circumstances that a dividend of 25 per cent declared in 1922 to be paid out of the surplus and credited to the stockholders’ accounts was taxable to the stockholders as a cash dividend received in that year. In that case the liability of the stockholders for the new stock was fixed and definite more than a year before any dividend was declared by the corporation. The company was not bound by any corporate act to apply the dividend to the stockholders’ accounts. The sale of the new stock to the stockholders and the payment of the dividend were separate and independent acts of the corporation. In the instant case the issuance of the new stock and the payment of the dividend were authorized by the same resolution and were dependent one upon the other. The subscription for the new stock was a condition precedent to the payment of the dividend.

In Eisner v. Macomber, supra, the principal question before the court was whether a stockholder is taxable upon the receipt of a bona ■fide stock dividend. The case is helpful here only as it may aid in distinguishing between a stock dividend and a cash dividend. In its opinion, the court said:

A “ stock dividend ” shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. * * *

The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. * * *

In United States v. Mellon, supra, where the facts were somewhat similar to those in the instant case, the court held that a stock dividend rather than a cash taxable dividend was received by the taxpayer. The court in its opinion said:

From all of this it is quite evident that all of the acts of the company, whether called issues of stock or declarations of dividend, were in fact and reality a refinancing of the corporation, in which this defendant and other large stockholders bound themselves to pay, and in fact did pay, into the company’s treasury the additional capital which it required. Their position was not that of having an option to take stock or to take money, but it was an obligation to take stock for which they agreed to pay. * * *

*788Under a similar set of facts, the court found in United States v. Davison, supra, that a stock dividend rather than a cash dividend was received by the taxpayer, saying in part:

* * ⅜ If the purpose of the corporation is to retain the accumulated profits, while in effect distributing them as a dividend, it would seem immaterial whether the stock was issued direct or the stockholder given the right to apply the cash dividend declared in payment of the new stock, as the effect in the two cases would be precisely the same. In either case, the accumulated profits are legally retained for corporate purposes. In neither case has the stockholder received anything out of the company’s assets for his individual use. On the other hand, his original investment and its accumulations, still remain the property of the company and subject to the hazards of its business. In fact, lie has not received that which may be properly designated income. * * *

From a consideration of all of the facts in this case, we are convinced that the intent and purpose of the corporation which the petitioner urges should be given due consideration were to retain its accumulated profits for corporate purposes and to increase its capital rather than to pay out its surplus to the stockholders for their separate use and benefit. After all of the provisions of the resolution authorizing the dividend had been carried out, both the corporation and the stockholders were in the same position as if the surplus on hand had been capitalized and a straight 100 per cent stock dividend declared. In no event did the resolution authorize the corporation to distribute more than a 10 per cent cash dividend above the amount that was required to be paid back into the corporation’s capital.

The petitioner contends that since only 90 per cent of the stockholders were required to subscribe for new stock and since he owned less than 10 per cent of the outstanding stock he had the option of accepting either cash or new stock. It does not appear, however, that the petitioner had any option or privilege not enjoyed by all of the other stockholders. Manifestly, had all of the stockholders or even more than 10 per cent of them elected to choose cash instead of stock there would have been no dividend at all. There is no showing that 90 per cent of the stockholders had subscribed for their stock prior to the time that the petitioner, allegedly, exercised his option.

But granting, for the sake of argument; that the petitioner did have the option of accepting a cash dividend, the facts are that he did not elect to do so, but that he, along with the other stockholders, executed the power of attorney authorizing payment for his new stock subscription with the proceeds of the dividend. The petitioner by the transaction paid in no new capital to the corporation and received nothing from the corporation for his separate use and enjoyment.

*789Considering the intent and purpose of the corporation as well as as the acts of the parties to the transaction, we are of the opinion that the facts support the respondent’s determination that the dividend was a stock dividend resulting in a dilution of the shares of stock then outstanding.

Eeviewed by the Board.

Judgment will be entered for the respondent.

GEORGE T. SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Smith v. Commissioner

Docket No. 40321.

United States Board of Tax Appeals

21 B.T.A. 782; 1930 BTA LEXIS 1796;

December 17, 1930, Promulgated

*1796 Upon the facts in this proceeding, held that a dividend rereceived by the petitioner in 1914 from the Joseph Dixon Crucible Co. was a stock dividend.

W. W. Spalding, Esq., for the petitioner.

W. Frank Gibbs, Esq., and Owen W. Swecker, Esq., for the respondent.

SMITH

*783 This proceeding is for the redetermination of a deficiency in income tax for the year 1924 in the amount of $2,875.89. The only issue for our determination is whether the distribution made by the Joseph Dixon Crucible Co. In April, 1914, was a cash dividend or a stock dividend. The respondent and the petitioner have stipulated the material facts as hereinafter set forth and have further stipulated that the deficiency asserted by the respondent should be approved if, in the opinion of the Board, the dividend in question was a stock dividend. If a cash dividend, the net taxable income as determined by the respondent should be reduced by the amount of $12,500.

FINDINGS OF FACT.

The petitioner is an individual residing at Jersey City, N.J. On March 1, 1913, and thereafter continuously up to and during the year 1924, the petitioner was the owner of certain shares*1797 of the capital stock of the Joseph Dixon Crucible Co., a New Jersey corporation. In 1924 the petitioner sold 200 shares of the said stock for a consideration of $27,796.

On March 30, 1914, the board of directors of the Joseph Dixon Crucible Co. passed a resolution containing a dividend declaration and certain provisions relating to the increase of its capital stock, which read as follows:

WHEREAS, the undivided surplus assets of this company now amount to over the sum of one million dollars, be it

RESOLVED: That a special cash dividend of one hundred per cent (or one hundred dollars per share) be, and it hereby is authorized to be paid, April 30, 1914, upon the capital stock of the Company, to holders of record at six o'clock P.M. April 10, 1914; provided this resolution shall not take effect and be considered binding and in force until the increase of this Company's capital stock to the sum of two million dollars, as provided for in a certain resolution passed by this Board this day, shall be approved by the stockholders, and the certificate of change of the charter of the Company in accordance therewith be filed with the proper authorities; and provided further that this*1798 resolution shall not take effect until certain other resolutions to be offered herewith, providing for the privilege of subscribing to said increase of capital stock, be accepted by at least ninety per cent in interest of the holders of the present outstanding shares of this Company, as indicated by their placing in the hands of the President of the Company their several powers of attorney for their subscriptions thereto.

RESOLVED: That the amount of one million dollars of this Company's capital stock (equivalent to one hundred per cent of the outstanding shares) be issued at par; provided that said increased amount of capital stock shall be authorized at a special meeting of the stockholders to be held on April 20, 1914, as provided in a resolution passed by this Board this day.

RESOLVED: That the privilege of subscribing pro rata at par for the stock to be issued under the foregoing resolution be and it hereby is offered to the *784 stockholders of this Company who are registered on the books of the Company as of six o'clock P.M. April 10, 1914, in the amount of one hundred per cent of their holdings.

RESOLVED: That no stockholder shall be entitled to subscribe by*1799 subscription delivered to the Company after twelve o'clock noon on the 25th day of April, 1914, or otherwise than in the way and manner set forth in the proposed circular to the stockholders hereinafter referred to. Any stock not thus subscribed for at such time may be disposed of by the President for the benefit of the Company, for not less than par, and the president is hereby authorized and directed to sell all such unsubscribed stock for the benefit of the Company as hereinbefore stated, at public or private sale, at such time and in such quantities as he may deem proper.

The increase of the capital stock of the company in the amount of $1,000,000, as provided in the said resolution, was authorized by the stockholders on April 20, 1914, and the certificate for the change of the corporate charter was duly filed with the State authorities.

On March 30, 1914, the company issued to its stockholders a notice relating to the above resolution, which reads in part as follows:

The Board of Directors of The Joseph Dixon Crucible Company, at a special meeting held this day, authorized an appropriation out of the accumulated surplus of the Company of an amount equivalent to one hundred*1800 per cent of the par value of its capital stock and the distribution of the same as a dividend on April 30, 1914, pro rata to stockholders of record at six o'clock p.m. on April 10, 1914; provided at least n-i-n-e-t-y per cent in interest of the stockholders exercise the privilege of subscribing to an increase in the capital stock of the Company according to the terms hereinafter set forth.

The Board also passed a resolution submitting to the stockholders the question of increasing the capital stock of the Company to the sum of Two Million Dollars, said increase to be voted upon at a meeting to be held at three o'clock p.m. on April 20, 1914. The Board has further authorized the issue of these additional shares, with the privilege to stockholders of record at six o'clock p.m., April 10, 1914, of subscribing to such new stock to the extent of one hundred per cent of their holdings at that time.

The privilege to subscribe must be exercised at or before twelve o'clock noon April 25, 1914, and stockholders who avail themselves of this privilege must subscribe for the whole of their allotment, as a subscription for a portion of the allotment will not be considered. In order to insure*1801 a full subscription to the additional issue of capital stock and the payment thereof, all shares of stock not subscribed for by twelve o'clock noon April 25, 1914, and paid for by twelve o'clock noon April 30, 1914, will be sold by the Company at the discretion of the Board of Directors.

Enclosed herewith is a blank power of attorney to be duly executed by those stockholders who desire to subscribe to the capital stock aforesaid. [Briefly, the power of attorney referred to authorized the attorney to subscribe for the new stock and receive the dividend when issued and pay it in on the new stock subscription.]

* * *

Such stockholders as shall not exercise and deliver the power of attorney above referred to, nor otherwise subscribe for shares, at or before twelve o'clock noon of April 25, 1914, and pay for the same at or before twelve o'clock noon of April 30, 1914, will receive from the Company a check in payment of the dividend; provided n-i-n-e-t-y per cent of the stockholders in *785 interest elect to subscribe on or before twelve o'clock noon of April 25, 1914, to the shares of stock to which they are entitled.

* * *

It is especially important that stockholders*1802 execute the enclosed powers of attorney to receive dividends and subscribe for stock promptly, and mail them in the enclosed stamped envelope, as the dividend above referred to, and the subscription to the shares of stock of the Company will not become effective until at least n-i-n-e-t-y per cent in interest of the stockholders have subscribed.

Between April 10, 1914, and April 25, 1914, all of the stockholders of the company, including the petitioner, in the manner stated in the notice to the stockholders, subscribed for and obtained their respective quotas of the new stock authorized by the resolution of the directors of March 30, 1914, and that of the stockholders of April 20, 1914. Petitioner thus acquired shares of stock of the company equaling in number the shares previously owned by him.

In accordance with the resolutions adopted, the corporation made and delivered to each stockholder its checks in the amount due him, with the understanding that the checks were to be endorsed and returned to the corporation. Such checks were endorsed and returned to the corporation and were never cashed or cleared through any bank. The new stock subscribed for was delivered to each*1803 stockholder in accordance with the above notice and resolution.

Throughout April, 1914, the petitioner owned less than 10 per cent of the outstanding shares of the capital stock of the company.

The balance sheet of the Joseph Dixon Crucible Co. as of March 31, 1914, showed assets and liabilities as follows:

Assets
Cash	$247,865.9
Accounts and bills receivable	359,872.10
Land	380,195.27
Buildings	905,409.79
Machinery	780,184.75
Products and materials	1,688,082.19
	4,361,610.07
Liabilities
Capital stock	$1,000,000.00
Surplus	2,947,393.57
Reserve for fire insurance, Florida	51,625.00
Reserve for depreciation	362,191.50
Accounts payable	400.00
	4,361,610.07

There was no material change of its financial condition in April, 1914. Throughout that month the company had on hand, available for use for any corporate purpose, more than $100,000 in cash, but not in excess of $250,000 in cash.

OPINION.

SMITH: The controversy here arises with respect to the base to be used in computing the petitioner's profit or loss upon the sale of the 200 shares of stock of the Joseph Dixon Crucible Co. in 1924. The petitioner had purchased the stock*1804 prior to March 1, 1913, and it *786 had a fair market value at that date of $312.50 per share. In 1914 the Joseph Dixon Crucible Co. declared a dividend of 100 per cent. In 1920 it declared another dividend of 150 per cent, which the petitioner and the respondent agree was a stock dividend which served to reduce the base to $125 per share. The question now arises as to whether the 100 per cent dividend declared and paid by the corporation in 1914, under the circumstances above described, was a cash dividend or a stock dividend which served to further reduce the base to $62.50 per share.

In support of his position that the 1914 dividend was a stock dividend, the respondent, in his brief, relies upon ; ; ; affd., ; certiorari denied April 26, 1926; and certain decisions of the Board. The petitioner in his brief cites , and *1805 .

None of these cases can be considered as controlling in this proceeding, however, for the reason that the question presented, viz., whether the distribution made by the Joseph Dixon Crucible Co. in 1914 was, with respect to the petitioner's participation, a stock dividend or a cash dividend, is one of fact to be determined upon the evidence before us.

The facts here differ materially from those found in either the Hunt case or the Brading case. For instance, in the Hunt case the stockholders had agreed, independently of any corporate action, prior to the declaration of the dividend that they would pay back into the company a part of the proceeds of the dividend by a simultaneous exchange of checks. In the instant case, the company by corporate action and as a part of the same resolution authorizing the declaration of the dividend made it a condition precedent thereto that at least 90 per cent of the stockholders would subscribe for new stock to the par value of their present holdings and the equivalent of their pro rata parts of the proposed 100 per cent dividend. In our opinion in*1806 the Hunt case we said:

In this case, even if it be conceded that the individual members of the board of directors could have legally bound the corporation, it is not alleged by way witness that the agreement referred to was other than an agreement between the stockholders, those who were to receive the dividends, and it related to what they would do with their dividends and not to the manner in which the corporation would distribute the dividends. There is no evidence that the directors as such undertook to act for the corporation. The resolution declaring the dividend did not recognize any such agreement as having been made. It is true that the corporation may have acted any very likely did act upon the assumption that the stockholders, in accordance with the agreement among themselves, would purchase stock with their dividends, but this is not sufficient to change what was declared by the corporation to be a cash dividend to a stock dividend. The stockholders were not legally bound to take stock.

*787 In the Brading case, the corporation in 1920, pursuant to a resolution of the stockholders, increased its capital stock 100 per cent and issued to each of the*1807 four stockholders his proportionate part of the new stock. The shares of stock were charged in the company's books to each stockholder and the indebtedness was "to be liquidated by dividends now due and hereafter to become due, or in such manner as the Board may hereafter direct." We held under those circumstances that a dividend of 25 per cent declared in 1922 to be paid out of the surplus and credited to the stockholders' accounts was taxable to the stockholders as a cash dividend received in that year. In that case the liability of the stockholders for the new stock was fixed and definite more than a year before any dividend was declared by the corporation. The company was not bound by any corporate act to apply the dividend to the stockholders' accounts. The sale of the new stock to the stockholders and the payment of the dividend were separate and independent acts of the corporation. In the instant case the issuance of the new stock and the payment of the dividend were authorized by the same resolution and were dependent one upon the other. The subscription for the new stock was a condition precedent to the payment of the dividend.

*1808 In , the principal question before the court was whether a stockholder is taxable upon the receipt of a bona fide stock dividend. The case is helpful here only as it may aid in distinguishing between a stock dividend and a cash dividend. In its opinion, the court said:

A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. * * *

The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. * * *

In *1809 , where the facts were somewhat similar to those in the instant case, the court held that a stock dividend rather than a cash taxable dividend was received by the taxpayer. The court in its opinion said:

From all of this it is quite evident that all of the acts of the company, whether called issues of stock or declarations of dividend, were in fact and reality a refinancing of the corporation, in which this defendant and other large stockholders bound themselves to pay, and in fact did pay, into the company's treasury the additional capital which it required. Their position was not that of having an option to take stock or to take money, but it was an obligation to take stock for which they agreed to pay. * * *

Under *788 a similar set of facts, the court found in , that a stock dividend rather than a cash dividend was received by the taxpayer, saying in part:

* * * If the purpose of the corporation is to retain the accumulated profits, while in effect distributing them as a dividend, it would seem immaterial whether the stock was issued direct or the stockholder given*1810 the right to apply the cash dividend declared in payment of the new stock, as the effect in the two cases would be precisely the same. In either case, the accumulated profits are legally retained for corporate purposes. In neither case has the stockholder received anything out of the company's assets for his individual use. On the other hand, his original investment and its accumulations, still remain the property of the company and subject to the hazards of its business. In fact, he has not received that which may be properly designated income. * * *

From a consideration of all of the facts in this case, we are convinced that the intent and purpose of the corporation which the petitioner urges should be given due consideration were to retain its accumulated profits for corporate purposes and to increase its capital rather than to pay out its surplus to the stockholders for their separate use and benefit. After all of the provisions of the resolution authorizing the dividend had been carried out, both the corporation and the stockholders were in the same position as if the surplus on hand had been capitalized and a straight 100 per cent stock dividend declared. In no event*1811 did the resolution authorize the corporation to distribute more than a 10 per cent cash dividend above the amount that was required to be paid back into the corporation's capital.

But granting, for the sake of argument, that the petitioner did have the option of accepting a cash dividend, the facts are that he did not elect to do so, but that he, along with the other stockholders, executed the power of attorney authorizing payment for his new stock subscription with the proceeds of the dividend. The petitioner*1812 by the transaction paid in no new capital to the corporation and received nothing from the corporation for his separate use and enjoyment.

*789 Considering the intent and purpose of the corporation as well as as the acts of the parties to the transaction, we are of the opinion that the facts support the respondent's determination that the dividend was a stock dividend resulting in a dilution of the shares of stock then outstanding.

Reviewed by the Board.

Judgment will be entered for the respondent.

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