
    William E. Fulton, Petitioner, v. Commissioner of Internal Revenue, Respondent. William Shirley Fulton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 14260, 19401, 29646, 15580, 19884.
    Promulgated March 21, 1929.
    
      Barry Mohnm, Esq., for the petitioners.
    
      Earl W. /Shinn, Esq., for the respondent.
   OPINION.

Gbeen:

The respondent has based his deficiencies on the theoiy that the distribution to the stockholders of the Manufacturers National Bank by the trustees is taxable as a dividend. The petitioners contend that the monies paid to them by the trustees, acting for and oji behalf of the Manufacturers National Bank, constituted part of the consideration for the exchange of their stock in that bank for stock in the Citizens & Manufacturers National Bank, and, that under section 202 {e) of the Revenue Act of 1921, no income resulted from this transaction, because the amount of such monies did not exceed the basis prescribed by the statute to be used in the computation of gain or Joss resulting from the sale or other disposition of the stock.

To effect the merger of the two banks, a plan was devised whereby each bank should contribute the same amount of assets to the merged bank and then exchange stock in the old banks, share for share, for stock in the merged institution. The transfer of the necessary assets would leave the merged banks with assets in their possession. These additional assets, before the transfer to the Citizens & Manufacturers National Bank, were transferred to trustees for the benefit of the respective stockholders.

The facts in the instant case are analogous to those in Appeal of R. G. Hubbard, 2 B. T. A. 1287, in which an agreement was made between the active and inactive stockholders of a corporation to the effect that the inactive stockholders should transfer their common stock in the corporation to the persons actively engaged in the management of the business. This agreement was carried into effect under an arrangement providing for the exchange of the common stock for preferred stock in an amount equal to the book value of the common stock, after excluding from the assets of the corporation certain securities owned by it and all accounts theretofore charged off the books. It was also agreed that the securities mentioned should be divided among the inactive stockholders and that the accounts should be turned over to a trustee to be collected by him for the benefit of the new common stockholders. In that case we held that the transfer of the unpaid accounts of the corporation to a trustee, to collect and pay the same to certain stockholders, constituted a declaration of a dividend, which became income to the stockholders when paid to them by the trustee.

In our opinion the distributions under consideration should be treated as dividends in the years in which they were paid.

Reviewed by the Board.

Judgment will Toe entered for the respondent.

Phillips,

dissenting: The question here is whether the money received by the petitioners is taxable as a dividend under section 201 of the Revenue Act of 1921 or falls within the provisions of sections 202 (c) (2) and 202 (e). The Supreme Court had much the same question before it in Hellmich v. Hellman, 485 Sup. Ct. 244; 276 U. S. 233, where it reached the conclusion that the payments there in question were not dividends. The payments here in question were received by the petitioners pursuant to the express terms of the reorganization agreement and not‘pursuant to any declaration of a dividend by the corporation. I am of the opinion that if we follow the reasoning of the court in the case cited, we must reach the conclusion that the payments in question are not dividends. Rather, they fall within that part of section 202 (e) which reads:

When property is exchanged ior property specified in paragraphs * * * (2) * * * of subdivision (c) as received in exchange, together with money * * *, the money * * * shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of that basis, shall be taxable to the extent of the excess.

I can not agree with the conclusion reached in the prevailing opinion.

Murdoch agrees with this dissent.  