
    ADELAIDE F. CHAPMAN v. THE UNITED STATES
    
    [No. D-204.
    Decided February 14, 1927;
    motion for new trial overruled October 24, 1927]
    
      On the Proofs
    
    
      Income tax; profit from sale of stock issued as dividend and representing increase of capitalisation. — Where the plaintiff has received stock issued as dividend and in connection with an increase of capitalization, and sells the stock so issued, her taxable income, derived from the sale, is to be determined by taking as the cost per share of the stock issued as dividend 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 John D. Chapman v. United States, ante, p. 106.
    
      The Reporter's statement of the case:
    
      Mr. Sanford Robinson for the plaintiff.
    
      Mr. Charles T. Hendler, with whom was Mr. Assistant Attorney Generad 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. Afterward 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 12014 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 of February 24, 1917. During the week February 21 — March 2, 1917, 15,900 shares were bought and sold upon the New York Stock Exchange at prices ranging from II414 to 103.
    III. Throughout the year 1917 plaintiff owned 1,800 shares of said original common capital stock of the Bethlehem Steel Corporation, which were acquired at an actual cost of $201,151.25 on the dates and in the amounts as follows:
    Jan. 18,1915 — 300 shares at 52y2_$15,787. 50
    200 shares at 52%_ 10,575. 00
    50 shares at 52%_ 2,637.50
    Feb. 5. 1915 — 500 shares at 51 %_ 26, 000.00
    300 shares at 51%_ 15,562. 50
    100 shares at 51%- 5,162. 50
    100 shares at 51%- 5,187.50
    40 shares at 52_ 2,085.00
    Feb. 9, 1915— 10 shares at 55%_ 553.75
    Oct. 29,1915 — 200 shares at 588_ 117,600. 00
    Total_201,151. 25
    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 her share of the 200 per cent stock dividend. Afterward, before December 31, 1917, plaintiff sold all of the 3,600 shares of said class B common stock so received as a stock dividend and received therefor $371,690.
    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 and on or about June 15, 1918, paid Federal income taxes amounting to $22,938.09, reported to be due in said return, to said collector of internal revenue. The plaintiff reported said stock dividend in said return as a dividend.
    VI. Thereafter and on or about June 26, 1922, an internal revenue agent made a report of his field examination of plaintiff’s Federal tax returns for the years 1917 and 1918, and the Commissioner of Internal Revenue by letter dated January 12, 1923, notified the plaintiff that an examination of her income-tax returns and books of accounts and records for the years 1917 and 1918 disclosed an additional tax liability for the year 1917, aggregating $64,199, and an over-assessment for the year 1918 amounting to $3.69.
    Thereafter and on or about March 21, 1923, the Commissioner of Internal Revenue made an assessment of additional income taxes against plaintiff for the calendar year 1917 amounting to $64,199. On or about May 16, 1923, the collector of internal revenue at Hartford, Conn., notified the plaintiff of such assessment, which additional taxes plaintiff paid to said collector of internal revenue on or about May 25, 1923, under protest. Thereafter and on or about June 12, 1923, plaintiff duly filed claim for the refund of the additional tax so paid, which claim for refund was rejected by the Commissioner of Internal Revenue on or about August 23, 1923.
    
      VII. Said additional assessment was1 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 $37.25 per share, which was arrived at by taking- the cost ($201,151.25) 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.
    The court decided that plaintiff was not entitled to recover.
    
      
       Writ of certiorari granted.
    
   Moss, Judge,

delivered the opinion of the court:

The plaintiff, Adelaide F. Chapman, in the year 1917 was the owner of 1,800 shares of the common capital stock of the Bethlehem Steel Corporation, which was acquired on various dates and at different prices in the year 1915, the total cost being $201,151.25. On January 23, 1917, the directors voted to increase the capitalization of 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 her proportion of the stock dividend. Plaintiff reported said stock dividend in her tax return for 1917 as dividend. Thereafter, and before December 31, 1917, plaintiff sold the 3,600 shares received as a stock dividend for the sum of $371,690.

Plaintiff contends 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; and plaintiff is suing for the recovery of the additional tax paid amounting to $64,199.

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 191G as amended has no application. The Commissioner of Internal Revenue assessed the additional 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 1911 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.

The commissioner in computing the cost of the 3,600 shares properly considered the original total cost of 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 3,600 shares at $37.25 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 $201,151.25 plaintiff acquired a capital interest in the corporation, and she received as evidence of that interest 1,800 shares of the original common stock, and without further cost she also received an additional 3,600 shares, or a total of 5,400 shares. Her interest in the corporation was neither increased nor diminished by the later acquisition of the 3,600 shares. It remained precisely the same.

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 be dismissed. And it is so ordered.

GRaham, Judge; Hay, Judge; Booth, Judge; and Campbell, GKief Justice, concur.  