
    BENJAMIN B. FOSTER AND ROBERT R. TODD, EXECUTORS OF THE ESTATE OF ANNA FOSTER FORD, DECEASED, v. THE UNITED STATES
    [No. 42642.
    Decided December 7, 1936.
    Motion ior new trial overruled, with opinion, April 5, 1937]
    
      Mr. Hugh G. Bickford for the plaintiffs. Mr. G. Glifton Owens was on the briefs.
    
      Mr. George H. Foster, with whom was Mr. Assistant Attorney General Robert H. Jackson, for the defendant.
   GeeeN, Judge,

delivered the opinion of the court:

The plaintiffs, claiming that the decedent in her lifetime overpaid her taxes for the year 1930, bring this suit to recover the alleged overpayment, being $740.60 together with interest from March 12, 1931. There is no dispute as to the facts.

For the calendar year 1930 the decedent filed a return stating her taxable income to be $29,697.29 and paid the tax thereon. Included in decedent’s reported income was the sum of $23,250 received from the Foster Lumber Company as dividends on 155 shares of stock of that company owned by her. This was out of a dividend of $225,000 declared on February 11, 1930.

Plaintiffs claim that $14,754.22 included in the dividend of $23,250 was paid by the company out of surplus accumulated prior to March 1, 1913, and hence was exempt from tax. The Commissioner of Internal Eevenue rejected this claim and the decedent having filed a claim for refund which was also denied, brought this suit.

The Foster Lumber Company was organized in 1896 and up to 1929 its capital stock consisted of 2,000 shares of the par value of $100 per share. On March 1, 1913, its earnings and surplus were in excess of $3,725,000. On October 10, 1929, having determined to retire 500 shares of the capital stock, the company paid in cash to its stockholders $1,025,000 and 500 shares of the stock were surrendered to the company for cancellation. Of this sum $975,000 was charged to surplus and $50,000 was charged to capital stock.

The plaintiffs rely on section 115 (b) of the revenue act of 1928 which provides that—

For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.

It is contended that this provision is controlling here and that consequently the distribution made on October 10,

1929, must be treated as made out of earnings or profits accumulated since February 28, 1913, to the extent thereof. As the amount of such earnings remaining undistributed at that time was only $330,578.98, it is plain that if this rule is applied the distribution would more than absorb all of this amount leaving nothing to be carried over to the next year.

In the interval from October 10, 1929, to February 11, 1930, when $225,000 was distributed, the corporation accumulated $82,758.17 and plaintiffs claim that this was all which was distributed on the date last mentioned out of earnings and profits accumulated since February 28, 1913. If this is correct, the remainder of the dividend, $142,241.83, was not subject to income tax when it came into the hands of the stockholders and the Commissioner erred in holding to the contrary and in refusing to allow the decedent’s claim for a proportionate reduction in her income tax for that year.

The defendant, on the other hand, contends that the distribution made in 1929 constituted an exception to the general rule expressed in section 115 (b) and is covered by a provision in 115 (c) which reads as follows:

In the case of amounts distributed in partial liquidation * * * 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.

It will be seen that the ultimate issue between the parties is whether the distribution of 1929 was “properly chargeable to capital account.”

In determining the question thus presented the nature of the distribution must first be considered.

Clearly the distribution was not a dividend, either in the special sense that the word is used in the statute as defined in section 115 (a), or in its meaning as generally used, which is somewhat bi'oader. The definition set out in the statute was evidently inserted to make sure that there could be no claim that a distribution made out of profits was not a dividend. The distinction between a dividend and such a distribution as is made in the case before us is quite plain. When a dividend is made, the stockholder receives something but pays nothing. In the case at bar, the stockholder received money from the corporation but gave what may be considered as full value for what she received. Neither the stockholder nor the corporation had gained by the transaction. We think that if profits were distributed, as is now claimed by the plaintiffs, the stockholder would not have been required to pay for what she received. What the corporation turned over to the stockholders was the value of their stock which appears to be the same as on March 1, 1913. This is treated by the law as a basis of the determination of gain or loss to the stockholder in the transaction, and we think it is so treated on the ground that earnings or profits accumulated prior to that date- constituted for tax purposes the capital of the taxpayer. When the stockholders obtained the March 1,1913, value of their stock, it was the realization of capital, and was properly chargeable to capital account.

A consideration of the purpose of section 115 (c) of the act of 1928 and the reports made by the committees of the House and Senate when it first became a part of the revenue law supports the view above expressed. As the law originally stood, the plan devised in the case before us could be carried out so that the earnings and profits accumulated since 1913 would be distributed tax free. The general provisions of 115 (b), which were in the former act, would have required the distribution to be treated as made out of earnings or profits accumulated after February 28, 1913, and the distribution would be properly chargeable to surplus and paid out of such profits with the result that the distribution made October 10, 1929, absorbed all of the earnings and profits to that date. Obviously this would enable the stockholders to escape taxation although they had received earnings and profits which had accumulated since February 28, 1913. To prevent this avoidance of taxes, what is now section 115 (c) of the revenue act of 1928 was inserted in the revenue act of 1924 as section 201 (c). This new provision stated an exception to section 115 (b), namely a case where the distribution was “properly chargeable to capital account.” When the 1924 act was reported, the reports on the bill made by both the Senate and House Committees contained the following statement:

The theory of liquidating dividends is extended to distributions in partial liquidation. If a corporation retires a portion of its capital stock, the transaction is treated, from the point of view of the stockholder, as a sale of his stock. If the corporation distributes an amount in partial retirement of its capital stock, the amount thereof is to be considered as a retv/rn of capital, and taxable only if, as, and to the extent that it exceeds the basis of the stock. [Italics ours.]

In the case before us, the corporation distributed an amount in partial retirement of its capital stock and, as stated in the report, this is “considered as a return of capital.” Money paid out in making a return of capital is “properly chargeable to capital account.” It is true that the reports presented the matter “from the point of view of the stockholder”, but the principle is the same when applied to the corporation. The distribution came within the provisions of 115 (c), being properly chargeable to capital account, and consequently was not to be considered as a distribution of profits under 115 (b).

If the distribution of 1929 was charged to capital account, as it should be according to what we have held above, the profits which had accrued since 1913 and then on hand would not be depleted thereby. When the 1930 distribution was made, then, under the provisions of 115 (b), it would be paid out of these profits to the extent thereof. When the decedent received her share of these profits, the Commissioner rightly held that she was taxable thereon.

The petition must be dismissed and it is so ordered.

Whaley, Judge; Williams, Judge; LittletoN, Judge; and Booth, Chief Justice, concur.

supplemental opinion on motion for new trial

Green, Judge,

delivered the opinion of the court:

In the argument in support of the motion for new trial it is strenuously insisted that the decision of the court is contrary to the rule laid down in a decision by the Supreme Court, one made by the Circuit Court of Appeals for the Second Circuit, and also another by the Board of Tax Appeals. As no reference was made to these cases in the original opinion, it is thought best to show why the court did not mention them.

Special reliance is placed upon the case of Helvering v. Canfield, 291 U. S. 163, and it will be admitted that the opinion in the case at bar is not in accord with some statements found in the opinion of the Supreme Court in that case, but the reason is plain. We have before us a different act imposing a different rule. The decision in the case just cited was made under the provisions of section 201 (b) of the revenue act of 1921; the holding in the case at bar is based upon the special provision contained in the act of 1924 [201 (c)] which was inserted for the purpose of making an exception to the provisions of the law that controlled the Canfield case, sufra. In fact it could have been inserted for no other purpose and is otherwise meaningless. Counsel quote from the opinion of the Supreme Court in the last named case the following:

Nor is it important that the accumulated profits, as they stood on March 1, 1913, constituted capital of the company as distinguished from the gains or income which the company subsequently realized.

Clearly it was not as the statute then stood, but it is now in such cases as the one we have before us. Section 201 (c) of the 1924 act provided that—

(c) 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. * * * In the case of amounts distributed in partial liquidation * * * 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 subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

In the case at bar it is conceded that there was a distribution in partial liquidation, which the statute says “shall be treated as in part or full payment in exchange for the stock”, and further that if it is “properly chargeable to capital account” it shall not be considered as “within the meaning of .subdivision (b) ” upon which the plaintiffs rely.

In support of their argument that the distribution of 1929 was not “properly chargeable to capital account”, counsel for plaintiffs quote further from the opinion of the Supreme Court—

When a corporation continued in business after March 1, 1913, the dividends it later declared and paid to its stockholders, whether out of current earnings or from profits accumulated prior to that date, constituted income to the stockholders, and not capital, and were taxable as income if the Congress saw fit to impose the tax.

But in the Canfield case from which this quotation was taken, the Supreme Court was applying the 1921 act to “dividends.” In the instant case we must apply the 1924 statute to an “amount distributed in partial liquidation” which, like amounts distributed in complete liquidation, to the extent of the distribution must be “treated as in full payment in exchange for the stock.” Payments for stock are chargeable to capital account.

The case of John B. Stewart v. Commissioner, 29 B. T. A. 809, also, in our opinion, has no application. It is necessarily taken out of the special provision above quoted by the fact that the Board held that the distribution then under discussion was not “a distribution in partial liquidation” but a dividend and controlled by subdivision (b) of section 115 of the act of 1928. The plaintiffs also cite the case of Horrmann v. Commissioner, 34 B. T. A. 1178, wherein it is said that “ the ‘capital account’ referred to by the statute is not increased by the issuance of a nontaxable stock dividend, but comprises only the paid-in capital.” We are not disposed to agree with the construction which counsel place upon this statement but it is immaterial because the instant case does not involve any stock dividend and the Supreme Court has held that stock dividends are not a distribution. The case last cited is quite complicated in its facts and to review it fully would unduly extend this opinion. We agree with the holding made in the opinion that “normally the redemption of stock is a return of capital”, and also that “as an accounting matter the whole would be charged against capital”, but are not disposed to agree as to all that is said in the opinion with reference to the meaning of the statute under discussion. The case of Harter v. Helvering, 79 Fed. (2d) 12, did not involve a “distribution in partial liquidation” and consequently what is said therein has no application here.

The case of Hellmich v. Hellman, 276 U. S. 233, is not cited by either party. Possibly this failure is due to the fact ¡that the ultimate question in the case is not the one which is now before this court, but in the course of its opinion the court in effect ruled on the matter now in controversy. In this case it was held that—

* * * the general definition of a dividend in § 201 (a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by § 201 (c), which, dealing specifically with such liquidation, provided that the amounts distributed should “be treated as payments in exchange for stock” * * *.

In Klein on Income Taxation, par. 10:18 (a), it is said that—

Under this rule [as stated in Hellmich v. Hellman, supra] it does not matter that part of the liquidating dividend came from accumulated earnings. The transaction is treated in its entirety as a capital transaction.

Being a capital transaction, the payments made would be chargeable to capital account and under the statute could not be considered in “determining the taxability of subsequent distributions.”

The Board of Tax Appeals on March 15, 1937, entered a memorandum opinion in the case of Craig, Executor, v. Commissioner, which involved the same facts and pertained to the same estate as the case at bar. The decision rendered was in accordance with the contentions of the plaintiffs made in the case now before this court and was contrary to the views which we have expressed above. As the reasoning upon which this opinion was based is not expressed, we can only say that we do not concur.

Our conclusion is that the motion for new trial must be overruled, and it is so ordered.

Whaley, Judge; Williams, Judge; Littleton-, Judge; and Booth, Chief Justice, concur. 
      
       The changes made in the revenue acts have led to some confusion in applying the statutes. The 1918 act contained a provision that “amounts distributed in the liquidation of a corporation shall be treated as payment in exchange for stock or shares.” For some reason this provision was omitted in the 1921 act under which the Canfield case was decided; but it was restored in the 1924 act with some amplification as shown in the quotation from that statute. It is still in force under a different section number. In the 1924 act the part material to the case under consideration was designated as section 201 (a), (b), and (e). In the 1928 act, it is marked section 115 (a), (b), and (c).
     
      
       This case was decided under the 1918 act. See note 1 for the provision therein with reference to amounts distributed in liquidation.
     