
    JOHN D. CHAPMAN v. THE UNITED STATES 
    
    [No. D-203.
    Decided February 14, 1927]
    
      On the Proofs
    
    
      Income tarn; profit from sale of stoclo issued as dividend and representing increase of capitalization. — (1) Income resulting from the sale of stock issued as a stock dividend and representing an increase of capitalization, is not the receipt of dividend within the meaning of the income-tax laws, hut is gain or profit derived from the sale of stock.
    (2) Where the plaintiff has received as a dividend stock issued in connection with an increase of capitalization, and sells his original stock and the stock so issued, his taxable income, derived from the sale, is to be determined by taking as the cost per share of all the said stock an average obtained by treating the cost of the original purchase as the total cost of the original shares and those issued as dividend. See Adelaide F. Chapman v. United States, post, p. 424.
    
      
      The Reporter's statement of the case:
    
      Mr. Sanford Robinson for the plaintiff.
    
      Mr. Charles T. Hendler, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. Mr. J. Robert Anderson was on the brief.
    The court made special findings of fact, as follows:
    I. Plaintiff is a resident of the town of Greenwich, county of Fairfield, State of Connecticut, and a citizen of the United States.
    II. The Bethlehem Steel Corporation, organized under the laws of the State of New Jersey, on January 1, 1917, and until February 17, 1917, had an authorized common stock of a par value of $15,000,000, divided into 150,000 shares of the par value of $100 each, all of which was issued and outstanding. On or about January 23, 1917, the directors voted to increase the capitalization of the corporation, and in this connection declared a stock dividend of 200 per cent upon said common stock. The shares so issued as a stock dividend have no voting rights, but otherwise have the same rights as the original common stock. These shares are designated class B common stock, and they are hereinafter referred to as class B shares. The original common stock retained its voting rights and was designated and is hereinafter referred to as class A common stock. After-wards, and on or about February 17, 1917, the Bethlehem Steel Corporation issued and delivered to stockholders 300,000 shares of said class B stock of the par value of $100 each, totaling $30,000,000, representing the said stock dividend. One hundred shares of said class B stock sold on a “ when issued ” basis on the New York Stock Exchange on February 17, 1917, at 120% and another 100 shares sold on the same day at 121. The stock was first listed and traded in on the New York Stock Exchange on February 24, 1917. During the week February 24-March 2, 1917, 15,900 shares were bought and sold upon the New York Stock Exchange at prices ranging from 114% to 103.
    III. Throughout the year 1917 plaintiff owned 1,800 shares of said original common capital stock of the Bethlehem Steel Corporation, which was acquired during 1914 at a cost of $48 per share, or $86,400. On. or about February-17, 1917, plaintiff received from the Bethlehem Steel Corporation 3,600 shares of class B common stock of said corporation as his share of the 200 per cent stock dividend. After-wards, before December 31, 1917, plaintiff sold all of said 3,600 shares of class B common stock so received as a stock dividend and received therefor $371,928.
    IY. The net earnings of the Bethlehem Steel Corporation, according to the books of account, amounted to $27,-320,736.86 for the calendar year 1917, and $43,693,968.16 for the calendar year 1916.
    Y. Plaintiff filed a Federal income-tax return for the calendar year 1917 with the collector of internal revenue at Hartford, Conn., on or about April 1, 1918, in accordance with an extension duly granted, and thereafter on or about June 16, 1918, paid Federal income taxes amounting to $23,756.36 reported to be due in said return to the said collector of internal revenue. The plaintiff reported said stock dividend in said return as a dividend.
    VI. Thereafter and on or about March 14, 1923, the Commissioner of Internal Eevenue made an assessment of additional income taxes against plaintiff for the calendar year 1917 amounting to $103,371.58. The plaintiff paid the additional tax so assessed to said collector of internal revenue on or about March 20, 1923, under protest. Thereafter and on or about March 26,1923, plaintiff duly filed claim for refund of the full amount of additional taxes so paid, which claim for refund was rejected by the Commissioner of Internal Revenue on or about September 15, 1923.
    Said assessment was made on the basis of excluding said stock dividend from income as a dividend, and computing the profit from the sale of said 3,600 shares of class B common stock on the basis of a cost to the plaintiff of $16 per share, which was arrived at by taking the cost ($86,400) of the original purchase of 1,800 shares as the cost to the plaintiff of the original 1,800 shares and the 3,600 shares received in the stock dividend.
    VII. During the calendar year 1918 plaintiff sold his original 1,800 shares of class A common stock acquired as aforesaid at $48 per share, and his income-tax return for the year 1918 accounted for and included said sale price with other sales of stocks and bonds during the year 1918. In computing the profit from the sale of said class A common stock plaintiff reported the cost of said shares at $48 per share, or a total of $86,400.
    VIII. Thereafter and on or about June 26, 1922, the Commissioner of Internal Revenue caused a field audit to be made of plaintiff’s 1917 and 1918 income-tax returns, in which the cost to the plaintiff of said original 1,800 shares of class A common stock was determined to be $16 per share by taking the cost ($86,400) of the original purchase*as the cost of the original 1,800 shares and the 3,600 shares received as a stock dividend, instead of $48 per share as returned by the plaintiff. On this basis the cost to the plaintiff of said 1,800 shares of class A common stock was computed to be $28,800, instead of $86,400 paid therefor at the time of purchase, and said audit increased plaintiff’s taxable income for the year 1918 accordingly in the amount of $57,600.
    IX. Thereafter and on or about April 9, 1923, the Commissioner of Internal Revenue made an additional assessment against this plaintiff upon income for the year 1918 amounting to $28,697.41 which amount plaintiff duly paid to said collector of internal revenue on or about April 19, 1923, under protest. Thereafter and on or about May 1, 1923, plaintiff duly filed a claim for refund of the full amount of said additional tax so paid, which claim for refund was rejected by the Commissioner of Internal Revenue on or about October 29, 1923.
    X. If the taxpayer was correct in computing the profit from the sale in 1918 of said 1,800 shares of class A common stock on the cost basis of $86,400 instead of on the cost basis of $28,800 adopted by the Commissioner of Internal Revenue in making such additional assessment then the plaintiff has overpaid his Federal taxes upon income for the year 1918 amounting to $28,697.41.
    The court decided that plaintiff was not entitled to recover.
    
      
       Writ of certiorari denied.
    
   Moss, Judge^

delivered the opinion of the court:

Plaintiff, John D. Chapman, is seeking by this action to recover the sum of $132,089.99 additional income taxes collected from him for the years 1917 and 1918, $103,371.58 of which was collected for the year 1917, and $28,697.41 for the year 1918. The history of the transaction out of which this controversy arose is as follows:

Throughout the year 1917 plaintiff was the owner of 1,800 shares of the common capital stock of the Bethlehem Steel Corporation, which were acquired at a cost of $48 per share, or $86,400. On January 23, 1917, the directors voted to increase the capitalization of the said corporation, and in this connection declared a stock dividend of 200 per cent upon the common*stock; and on February 17, 1917, plaintiff received from the corporation 3,600 shares of the new stock as his proportion of the stock dividend. In his tax return for the year 1917 plaintiff reported said stock dividend as dividend. In the same year, and prior to December 31, 1917, plaintiff sold the 3,600 shares received as a stock dividend for the sum of $371,928.

It is plaintiff’s contention that the income resulting from the sale in 1917 of the stock received as a stock dividend in that year was taxable at the rates for prior years under the provisions of section 31 of the revenue act of 1916, as amended by section 1211 of the revenue act of 1917, 40 Stat. 300, 336-337, in which it is provided that in any distribution made by a corporation, whether represented by cash or by stock of the corporation, such distribution shall be considered income to the amount of the earnings or profits so distributed.

The Government contends, on the other hand, that the income resulting from the sale of the stock received as a stock dividend was not the receipt of dividend but was gain or profit derived from the sale of the stock, and that section 31 of the act of 1916 as amended has no application. The Commissioner of Internal Revenue assessed the tax on this basis, computing the tax on the difference between the cost of the stock and the amount realized from its sale, properly applying the 1917 rates.

The theory upon which the commissioner proceeded was correct as determined by the United States Supreme Court in the case of Towne v. Eisner, 245 U. S. 418; in Eisner v., Macomber, 252 U. S. 189, and in other cases, in which it was distinctly held that a stock dividend does not constitute taxable income.

In April, 1918, plaintiff sold his original 1,800 shares of stock, and his income-tax return for the year 1918 included the sale price with other sales of stocks and bonds during that year. In computing the profit from the sale of the 1,800 shares plaintiff reported the cost of said shares at $48 per share, or a total of $86,400. The commissioner, however, in computing the cost of the 1,800 shares properly considered the original cost of $86,400 paid by plaintiff for the 1,800 shares as representing the total cost of both the 1,800 shares and the 3,600 shares distributed as a stock dividend; and on this basis the commissioner fixed the cost of the 1,800 shares at $16 per share and assessed the additional tax accordingly. The plan adopted by the commissioner in ascertaining the profit was correct. To state the question simply, by the payment of the sum of $86,400 plaintiff acquired a capital interest in the corporation, and he received as evidence of this interest 1,800 shares of the original common stock, and without further cost he also received an additional 3,600 shares, or a total of 5,400 shares. His interest in the corporation was neither increased nor diminished by the later acquisition of the 3,600 shares. It remained precisely the same.

The same question applies to the sale of the 3,600 shares, and the same procedure was followed by the commissioner in arriving at the profit on that sale.

The contention of the plaintiff that the Government is barred by the statute of limitations is not tenable. It is the opinion of the court that plaintiff is not entitled to recover. It is therefore the judgment of the court that plaintiff’s petition should be dismissed. And it is so ordered.

Graham, Judge; Hay, Judge; Booth, Ju,dge; and Campbell, Chief Justice, concur.  