
    TENNEY ROSS v. THE UNITED STATES
    [No. 93-57.
    Decided June 3, 1959]
    
    
      
      Mr. Robert Holt Myers for the plaintiff. Messrs. John H. Myers, Frederick M. Bradley, Paul F. Myers and Williams, Myers and Quiggle were on the brief.
    
      Mr. John A. Rees, with whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Messrs. James P. Garland and Pyle M. Twmer were on the brief.
    
      
       Plaintiff’s petition for writ of certiorari denied by the Supreme Court October 26,1959, 361 Ü.S. 875.
    
   JoNEs, Chief Judge,

delivered the opinion of the court:

Plaintiff sues for refund of income taxes paid on an amount which the taxing authorities treated as a dividend, and which he claims should have been treated as long-term capital gain.

In 1954 plaintiff owned 450 shares of capital stock in the Washington Loan and Trust Company of Washington, D.C., hereinafter referred to as the “Trust Company”, a banking corporation organized under the laws of the District of Columbia. The Riggs National Bank of Washington, D.C., hereinafter referred to as the “Riggs Bank”, is a national banking association organized under the banking laws of the United States.

In April of 1954 the president of the Trust Company and the president of Riggs Bank and their assistants began preliminary discussions about a possible consolidation. The negotiations were at all times carried out at arm’s length and on a business basis. The president of the Trust Company requested the president of Riggs Bank to make an offer of exchange on a stock-f or-stock basis, and at all times the Riggs Bank officials knew that the Trust Company desired an exchange on that basis.

The representatives of the Riggs Bank found that a stock-for-stock offer would create unreasonably small fractional shares of stock, less than one-eighth of a share. The Riggs Bank representatives decided that their offer would be in terms of stock plus cash.

As a result of the preliminary negotiations, a study of the book values of the two banking institutions was made, and in May of 1954, the comptroller of the Riggs Bank prepared a “Suggested Exchange Offer” of one share of Riggs Bank stock for eight shares of Trust Company stock, plus $3 in cash for each Trust Company share. Apparently, no action was taken on that offer.

About three months later, the Equity Corporation of New York City offered to buy all the Trust Company stock for $51.50 a share.

Shortly thereafter negotiations between the Riggs Bank and the Trust Company were resumed. The book values of the two banks were recomputed as of the date of the Equity offer, and the adjusted book value of the Riggs Bank- was determined to be $392.89 a share and that of the Trust Company to be $49.08 a share. Studies indicated that a 1 for 8 exchange ratio would produce an ownership benefit of .27 percent, which would be a $75,000 ownership advantage to the Riggs Bank shareholders in the $26,000,000 assets of the consolidated bank. That would mean that the Riggs Bank would be contributing 82.49 percent of the assets and receiving 82.76 percent of the stock ownership in the combined bank. The Riggs Bank decided to make an offer of one share of Riggs Bank stock for eight shares of Trust Company-stock, plus a cash payment of $4.50 a share, or $52.83, as competitive with the offer of $51.50 made by the Equity Corporation. The second Riggs Bank offer was designed to be sufficiently higher than the Equity offer to discourage a counter-offer.

When the president of the Trust Company received the second Riggs Bank offer, he again requested that a stock-for-stock offer be made. He was told that a straight stock-for-stock exchange would result in 1.09311 shares for 8 shares. The Trust Company representatives tried to convert the offer into a stock-for-stock offer, but the fractional share would be something more than -%4 of a share and something less than %2 of a share in the consolidated bank. The president of the Trust Company, unable to persuade the Riggs Bank to make such an offer, agreed to recommend to his board of directors that the second Riggs Bank offer be accepted.

The directors of the Riggs Bank and the directors of the Trust Company entered into an “Agreement of Consolidation” on the basis of the second Riggs Bank offer. This consolidation was effected pursuant to the provisions of section 3 of the National Banking Act of November 7, 1918, 40 Stat. 1043, as added by 44 Stat. 1224, and amended by 48 Stat. 162.

The necessary ratification and confirmation by the shareholders of each of the banking institutions, and the approval of the Comptroller of the Currency were obtained. The consolidation became effective at the close of business on October 1,1954.

As of the close of business on October 1, 1954, the Trust Company had earnings and profits of $909,671.49. Prior to the close of business on that same day, the Riggs Bank withdrew from its earnings and profits $450,000, which was set aside in a trust fund in the Riggs Bank trust department, to be used to pay the $4.50 per Trust Company share, as provided under the terms of the Agreement of Consolidation. The assets of the consolidated bank did not include the $450,000 withdrawn by the Riggs Bank, but did include all of the other assets of both banks.

Plaintiff exchanged his 450 shares of Trust Company stock for 56 shares of the consolidated bank and $2,025 in cash. It is plaintiff’s position that the $2,025 is capital gain within the purview of § 356(a) (1) (B) of the Internal Revenue Code of 1954.

The Government says that the cash received by plaintiff is either an ordinary dividend within the meaning of § 816 of the 1954 Code, or “has the effect of the distribution of a dividend” within the meaning of § 356 (a) (2).

The cash received by plaintiff was not physically paid to him by the Trust Company out of its earnings and profits, and, in a technical sense, cannot be an ordinary dividend as defined in § 816,

The issue here is a close one. There is no question of the good faith of both parties to the consolidation. The question here, however, is the wording and interpretation of the applicable statute. The ultimate question finally narrows down to whether the payment had the effect of a distribution of a dividend under § 356(a) (2).

The answer to that question depends on all the facts and circumstances surrounding the distribution. Idaho Power Company v. United States, 142 C. Cls. 534, cert. denied 358 U.S. 832; Northup v. United States, 240 F. 2d 304 (2d Cir. 1957) ; Smith v. United States, 131 C. Cls. 748 (1955) ; Commissioner v. Snite, 177 F. 2d 819 (7th Cir. 1949) ; Stein v. United States, 104 C. Cls. 446 (1945) ; Rheinstrom v. Conner, 125 F. 2d 790 (6th Cir. 1942), and cases cited therein.

The problem of dividend equivalence usually arises in reorganization cases under § 356 (§ 112(c) (2) of the Internal Revenue Code of 1939) and in redemption cases under § 302 (§ 115 (g) of the 1939 Code). The phrase “has the effect of the distribution of a dividend” in § 356 and its predecessor is in pari materia with the phrase “essentially equivalent to a dividend” as used in § 302 and its predecessor. Hawkinson v. Commissioner, 235 F. 2d 747 (2d Cir. 1956); Kirschenbaum v. Commissioner, 155 F. 2d 23 (2d Cir. 1946), cert. den. 329 U.S. 726.

Plaintiff says that the indicia of dividend equivalence applied by the courts in the general ai’ea of redemptions or cancellations are not applicable to his case. Different facts are considered depending upon the nature of the transaction from which the distribution arises, but the test remains the same, that of looking to all the facts and circumstances surrounding the distribution to appraise the consequences of the transaction.

Plaintiff urges vigorously that the Government’s position in this ease calls for a return to the automatic dividend equivalence theory, i.e., that whenever there is a distribution of “boot” money in connection with an exchange of stock or securities, and there are earnings and profits, the “boot” money is automatically a distribution of a dividend. Commissioner v. Estate of Bedford, 325 U.S. 283 (1945), has frequently been relied upon as authority for the automatic dividend equivalence theory. In Idaho Power, supra, this court, after a careful consideration of the Bedford case, held that it is consistent with the rule that the question of dividend equivalence is a question of fact in each case.

We have examined all the facts and circumstances of the instant case, and we cannot escape the conclusion that the payment had the effect of the distribution of a dividend.

It makes no difference whether the $450,000 was distributed out of the earnings and profits of the Trust Company or out of such funds of the Riggs Bank set aside before consolidation. Commissioner v. Owens, 69 F. 2d 591 (5th Cir. 1934) ; Woodward v. Commissioner, 23 B. T. A. 1259 (1931). The net result was the same. If a stock-for-stock exchange could have been worked out without long-drawn-out fractions, undoubtedly there would have been a simple exchange of shares. If the distribution had been out of the funds of the Trust Company, that company would have brought into the consolidated bank $450,000 less than it actually brought in. Since it was physically paid out of set-aside funds of the Riggs Bank, that institution brought into the consolidated bank $450,000 less than it would have contributed had the Trust Company paid out the funds before consolidation. Whichever method was used, the net assets of the consolidated bank would have been the same. The more circuitous route was taken. The result was the same. It was merely the mechanics that were different.

Because of the mechanics employed to effect the payment of the money to the Trust Company shareholders, the money was not physically paid out of earnings and profits of the Trust Company, but it was in reality funds earned and owned by the Trust Company. Had the Riggs Bank not withdrawn the $450,000 prior to consolidation, it would have been contributing 84.09 percent of the assets of tire consolidated bant rather than the 82.49 percent which it did contribute. The $450,000 distributed to the shareholders of the Trust Company represented the $75,000 imbalance of .27 percent in favor of the Riggs Bank shareholders and $375,000, i.e., .75 percent of the $50,000,000 deposits in the Trust Company, part of the “swing-in” value of certain non-book assets which the parties had agreed should be reflected in the exchange offer. Thus the $450,000 was identified as funds earned and owned by the Trust Company. They were as completely identified as was the one-eyed man who was suspected of cheating in the early days’ western poker game. One of the victims finally said, “Now, I am not going to call any names, but if the man around this table who has been cheating doesn’t stop, I am going to shoot out his other eye.”

So it follows that regardless of who physically paid out the money, and regardless of whose name is placed on those earnings, the effect is the same as if the Trust Company had made a distribution out of funds specifically labeled “Trust Company earnings and profits.”

The question is whether the declaration of a dividend by the Trust Company would have accomplished the same result as the distribution of the $450,000 by the Riggs Bank. Smith v. United, States, supra; Northup v. United, States, supra. In Smith, we found that the distribution of a dividend would not have accomplished the purpose of the corporation, which was the acquisition of stock to be optioned to and later purchased by a key employee, and therefore the distribution was not essentially equivalent to a dividend. Plaintiff says that the declaration of a dividend here would not have accomplished the purpose of effecting a consolidation, but neither would the payment by the Riggs Bank of the $450,000 have accomplished a consolidation, but it accomplished a step leading to the consolidation. The declaration of a dividend by the Trust Company would also have accomplished that same step, i.e., the step of bringing the stock ownership into line with the assets contributed.

Plaintiff argues vigorously that the results of this transaction show that this distribution does not have the effect of a dividend within the test set out in the Idaho Power case, supra, at page 539:

An important indicium of equivalence of a payment to a dividend is present if, after the exchange of stock and the payment, the shareholder still has the same or substantially the same interest in the corporation after the payment that he had before. The ordinary dividend received by a shareholder does not disturb his interest in the corporation at all. He has the right, in the future, to the same fixed rate of dividend on his preferred stock, or the same share of the profits, on his common stock, as he had before the dividend was paid. * * * [Emphasis added.]

Plaintiff says that after the consolidation his status was “drastically” changed: that prior to the consolidation he owned 450 shares in the Trust Company and after the consolidation he had some 56 shares in a different corporation; that before he had an interest of 4%00 of 1 percent in the Trust Company and after he had an interest of %0o of 1 percent in the consolidated bank. However, these changes are such as are inherent in any statutory consolidation. Plaintiff has the same right to receive dividends in the future and the same right to a share of the assets upon dissolution of the consolidated bank as he would have had, if the Trust Company had declared a dividend of $4.50 a share.

We have appraised the results of the transaction here in question, and we conclude that the payment had the effect of the distribution of a dividend.

The petition will be dismissed.

It is so ordered.

BktaN, District Judge, sitting by designation; LaRamoee, Judge; MaddeN, Judge, and Whitaker, Judge, concur.

FINDINGS OE FACT

The court, having considered the evidence, the report of Trial Commissioner Eichard H. Akers, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is a citizen of the United States and a resident of the District of Columbia. He kept his books on a cash basis. On February 8, 1955, he filed his individual Federal income tax return for the calendar year 1954 disclosing a total tax liability of $706.68 which was timely paid.

2. In 1954 the plaintiff owned 450 shares of capital stock in the Washington Loan and Trust Company of Washington, D. C.

3. The Riggs National Bank of Washington, D. C. (hereinafter referred to as the “Riggs Bank”), on August 24, 1954, and at all other times herein material was a national banking association organized under the banking laws of the United States. It had capital stock outstanding in the amount of $6,000,000, consisting of 60,000 shares of common stock having a par value of $100 per share.

4. The Washington Loan and Trust Company (hereinafter referred to as the “Trust Company”) on August 24, 1954, and at all other times herein material was a banking corporation organized under the laws of the United States relating to the District of Columbia. It had capital stock outstanding in the amount of $1,000,000, consisting of 100,000 shares of common stock having a par value of $10 per share.

5. The Riggs Bank and the Trust Company were located in the District of Columbia.

6. In April 1954, the president of the Trust Company and the President of the Riggs Bank and their immediate executive assistants entered into private preliminary discussions respecting possible consolidation. These discussions and negotiations between the representatives of the Riggs Bank and the Trust Company, which resulted in the consolidation, were carried out at arms length and on a business basis. It was agreed during these discussions that:

(a) Consolidation had advantages to the community, shareholders, depositors and employees.
(b) A study of the book values of the two institutions for the purpose of comparison was to be undertaken.
(c) No final comparison of book values could be made until a surcharge suit pending in the court against the Trust Company and a deceased co-trustee in the amount of $489,222.12 had been brought to a conclusion.

7. The president of the Trust Company requested the president of the Riggs Bank to make his offer of exchange on a stock for stock basis and the negotiators representing the Riggs Bank were at all times aware that the officials of the Trust Company desired that the exchange be made on that basis. However, the representatives of the Riggs Bank decided that the offer could not be expressed in terms of reasonable fractional shares of stock and determined that their offer should be in terms of stock plus cash which, as will hereinafter appear, was the manner in which the offer was ultimately made and accepted.

8. On May 1, 1954, the comptroller of the Riggs Bank completed six studies of comparative book values of the Riggs Bank and the Trust Company as of April 30, 1954, taking into consideration (1) the book values without reserve for bad debts; (2) book values with reserve for bad debts; (3) book values adjusted for taxes without reserve for bad debts; (4) book values adjusted for taxes with reserve for bad debts; (5) book values adjusted for taxes, possible surcharge liability, hidden assets, but without reserve for bad debts; and (6) book values adjusted for taxes, possible surcharge liability, hidden assets and reserve for bad debts, with the following results:

(a) The book value of the Riggs Bank stock compared to the Trust Company stock under the circumstances (1) to (6), inclusive, just described were, in order, as follows: $359.16 to $50.33; $3Y0.54 to $51.95; $359.16 to $48.30; $370.54 to $49.92; $359.16 to $47.14; and $370.54 to $48.76.
_(b) A comparison of the book values of 1 share of the Riggs Bank stock to 7 shares of the Trust Company stock without reserve for bad debts produced a dollar advantage to the Riggs Bank shareholder of $6.85, i. e., $359.16 to $352.31.
(c) A comparison of the book values of 1 share of the Riggs Bank stock to 7 shares of the Trust Company stock with reserve for bad debts, produced an advantage to the Riggs Bank shareholder of $6.89, i. e., $370.54 to $363.65.
(d)_ A comparison of the book values of 1 share of the Riggs Bank stock to 7% shares of the Trust Company stock, without reserve for bad debts but adjusted for taxes, produced a disadvantage to the Riggs Bank shareholder of $3.09, i. e., $359.16 to $362.25.
(e) A comparison of the book values of 1 share of the Riggs bank stock to 7% shares of the Trust Company stock, with reserve for bad debts and adjusted for taxes, produced a disadvantage to the Eiggs Bank shareholder of $3.86, i. e., $370.54 to $374.40.
(f) A comparison of the book values of 1 share of the Eiggs Bank stock to 7% shares of the Trust Company stock, without reserve for bad debts but with adjustment for taxes, possible surcharge liability and hidden assets, produced an advantage to the Eiggs Bank shareholder of $5.61, i. e., $359.16 to $353.55.
(g) A comparison of the book values of 1 share of the Eiggs Bank stock to 7% shares of the Trust Company stock, with reserve for bad debts, adjustment for taxes, possible surcharge liability and hidden assets produced an advantage to the Eiggs Bank shareholder of $4.84, i. e., $370.54 to $365.70.

9. The representatives of the Eiggs Bank at this time determined that a stock for stock offer had three substantive disadvantages to the Eiggs Bank:

(a) A study at the time of a stock dividend on the Eiggs Bank stock earlier in 1954 demonstrated that fractions less than one-eighth of a share could not be absorbed by the local securities market.
' (b) Bank capital is invariably expressed in even figures and odd fractional shares would produce an odd capital structure.
(c) In the event additional shares were authorized to even out a possible odd capital structure, but were not issued, then the capital structure would be further complicated by the preemptive rights of the shareholders in the authorized but unissued capital stock.

10. On May 4, 1954, the comptroller of the Eiggs Bank prepared a “Suggested Exchange Offer” in which he used an exchange ratio of one share of Eiggs Bank stock to 8 shares of Trust Company stock and $24 cash, i. e., $3 per share. The Suggested Exchange Offer assumed an adjusted book value as of April 30, 1954 (including the potential surcharge liability), of $48 for the Trust Company stock and $360 for the Eiggs Bank stock and assumed a capital structure of 72,500 shares of $100 par value.

11. In late June 1954, the Trust Company and the representatives of its deceased co-trustee agreed for the purpose of settlement to compromise the surcharge suit for $50,000, which compromise became public knowledge by entry of an order of court on August 6,1954.

12. On August 13,1954, a week after the entry of the order of court, the Equity Corporation of New York City by letter offered to buy Trust Company stock from the shareholders of the Trust Company for $51.50 per share.

13. The president of the Trust Company and the president of the Riggs Bank were vacationing when they learned of the above offer but, upon its publication, immediately resumed negotiations and instructed their subordinates to recompute the book values of the Trust Company and the Riggs Bank as of August 13, 1954, i. e., the date of the Equity Corporation offer.

14. The studies and negotiations produced the following results:

(a) The adjusted book value of the Riggs Bank stock was determined to be $392.89 per share and the adjusted book value of the Trust Company stock was determined to be $49.08 per share.
(b)_ It was determined that the adjusted basis of the combined assets of the two banks upon consolidation would be in the following approximate relationship:
(c) It was determined that a 1 for 8 exchange of stock of the Trust Company upon consolidation would produce a percentage of stock ownership upon consolidation as follows:
(d)_ A comparison of the percentage of assets to be contributed to the consolidated bank with the percentage of stock ownership that would follow a 1 to 8 exchange, indicated an ownership benefit to the Riggs Bank shareholder of .27% which, converted into dollars, was a $75,000 ownership advantage to the Riggs Bank shareholders in the $26,000,000 assets of the combined bank.

15.The negotiators agreed that in addition to adjusted book values, non-book assets such as the deposits and trust department business had a value (denominated by the Comptroller of the Treasury as the “swing-in” value) because they produce banking income. It was agreed by the negotiators that the exchange offer of the Riggs Bank should reflect the value of these assets. A study of this item produced the following:

(a) As of August 13, 1954, the date of the Equity Corporation offer, there were deposits in excess of $50,000,000 in the Trust Company. _
_ (b) Representatives of the Riggs Bank discussed with the Comptroller of the Currency the value normally placed upon deposits in consolidations or mergers and were advised that in the previous year (1953) the value placed on such deposits, in the case of the consolidation or merger of national banks, ranged between one-half of one per cent to one per cent.

16. The representatives of the Riggs Bank prepared recommendations for an exchange offer to be submitted for the consideration of the executive committee of the Riggs Bank. The steps taken were as follows:

(a) They took the adjusted book value of the Trust Company stock 'at $49.08, which amount had been computed as shown in finding 14.
(b) They reduced this value by $0.15 to reflect the per share loss to the Trust Company stock resulting from the excess of .27% of the assets contributed by the Trust Company over the percentage of stock allocated to the Trust Company shareholders.
(c) The net amount was a value of $48.33 per share for the Trust Company stock.
(d) The representatives of the Riggs Bank selected a maximum “swing-in” value of $375,000 for the $50,000,000 deposits of the Trust Company and computed the same to be .75% of deposits, that is, $3.75 per share of Trust Company stock.
(e) They inquired of the Comptroller of the Currency the propriety of valuing the deposits at .75% and were advised that such a value would meet with the approval of the Office of the Comptroller.
(f) They then prepared a study which indicated that an offer of exchange of 8 shares of Trust Company stock for 1 share of stock in the consolidated bank would have the following equivalent value to the Equity Corporation offer of $51.50 per share:

The executive committee of the Eiggs Bank elected the offer incorporating the exchange of one share for 8 plus $36, that is, $4.50 per share, as competitive with the offer of the Equity Corporation and recommended the same to the directors of the Eiggs Bank. The directors of the Eiggs Bank accepted the recommendation of the executive committee and authorized the president of the Eiggs Bank to convey that offer to the president of the Trust Company. That offer was designed to be competitive with the outstanding offer of the Equity Corporation of $51.50 per share. That offer was also made by the representatives of the Eiggs Bank after these representatives were satisfied that it could be justified to the stockholders of the Eiggs Bank and to the Comptroller of the Currency. It was felt by these representatives of the Eiggs Bank that it was sufficiently higher than the offer of the Equity Corporation so as to discourage a counteroffer by the Equity Corporation. All parties to the transaction were advised that the cash to be paid to the stockholders of the Trust Company in connection with the offer was to be paid out of the earnings and profits of the Eiggs Bank and it was paid from that source.

17. Upon receipt of that offer, the president of the Trust Company again requested that an offer be in terms of stock for stock but he was advised that a pure stock for stock exchange on this basis would result in an exchange of 1.09311 shares for 8 shares.

Eepresentatives of the Trust Company tried for a day to convert the offer of one share for 8 shares and $36 cash into a stock for stock offer but the fraction, which represented something more than 5/64ths of a share and something less than 3/32nds of a share, was such that they were unable to persuade the representatives of the Eiggs Bank to make a stock for stock offer.

When the president of the Trust Company finally recognized that a stock for stock offer would not be forthcoming from the Eiggs Bank, he agreed to recommend to the board of directors of tbe Trust Company that they accept the offer.

The representatives of the Trust Company at all times proposed and requested an exchange of stock for stock without cash but the representatives of the Riggs B ank concluded that the price they had to pay to meet the competitive offer of the Equity Corporation could not be expressed in terms of a stock for stock offer and that the inclusion of cash as an element of exchange was necessary to .meet the competitive offer of the Equity Corporation. As previously indicated, the representatives of the Riggs Bank were responsible for the inclusion of cash as a part of the offer.

18. On August 24, 1954, the directors of the Trust Company and the directors of the Riggs Bank entered into an “Agreement of Consolidation” which outlined the terms under which the Trust Company and the Riggs Bank were to consolidate under the charter of the Riggs Bank pursuant to the provisions of Title 12, U. S. C., Sec. 34a, “An Act to provide for the consolidation of National Banking Associations”, approved November 7, 1918, as amended.

That agreement contained the offer of the Riggs Bank to consolidate with the Trust Company on the basis of an exchange of one share of stock in the consolidated bank for 8 shares of Trust Company stock plus $36, that is, $4.50 per share.

19. The agreement of consolidation included in substance the following provisions:

(a) That the consolidation was to become effective upon ratification and confirmation by the shareholders of each bank and upon the issuance by the Comptroller of the Currency of a “Certificate of Consolidation”.
(b) That the Trust Company was to contribute assets having a value of at least $4,600,000 in excess of outstanding liabilities and that the Riggs Bank was to contribute assets having a value of at least $21,400,000 in excess of its liabilities.
(c) That upon consolidation the resulting bank was to have capital stock outstanding in the amount of $7,250,000, consisting of 72,500 shares of common stock having a par value of $100 per share, surplus amounting to $15,000,000, and undivided profits of not less than $3,750,000, that is, total capital stock, surplus, and undivided profits of not less than $26,000,000.
(d) That the shareholders of the Trust Company were to surrender the stock of the Trust Company in exchange for the 12,500 shares of stock in the consolidated bank and $450,000 in cash. The exchange was to be on the basis of one share of stock of the consolidated bank and $36 for each eight shares of stock of the Trust Company surrendered. No fractional shares were to be issued by the consolidated bank but the shareholders of the Trust Company who were entitled to fractional shares would receive a “Trustees Certificate of Participation” evidencing the right to such fractional shares in denominations of one-eighth to seven-eighths, inclusive. The shareholders of the Trust Company could sell or otherwise dispose of their Trustees Certificates of Participation or round out whole shares by purchase or otherwise.
(e) That the participation of the shareholders of the Eiggs Bank in the consolidated bank was to be on a share for share basis and, since the consolidation was to be under the charter and title of “The Eiggs National Bank of Washington, D. C.”, new certificates were not to be issued for the Eiggs Bank stock outstanding at the time of the consolidation.
(f) That the $450,000 to be paid the shareholders of the Trust Company was to be paid from a trust fund to be established by the Eiggs Bank in its trust department prior to the consolidation.

20. On September 14, 1954, the board of directors of the Eiggs Bank by resolution directed that, upon ratification of the Agreement of Consolidation by the shareholders of the Trust Company and the Eiggs Bank, the sum of $450,000 be transferred from the assets of the Eiggs Bank to the trust department of the Eiggs Bank prior to the consolidation.

21. On September 29, 1954, the shareholders of each bank ratified the Agreement of Consolidation to become effective at the close of business October 1, 1954, by the issuance by the Comptroller of the Currency of a certificate approving the consolidation. Each shareholder of each bank was entitled to one vote per share of capital stock owned by bim and at the meeting of shareholders called by each bank to ratify and confirm the Agreement of Consolidation on September 29, 1954, the votes cast by the shareholders of each bank were as follows:

22. On. October 1, 1954, the Comptroller of the Currency approved the consolidation of the Riggs Bank and the Trust Company as of the close of business 2 p. m. Friday, October 1,1954.

23. As of the close of business October 1, 1954, the Trust Company had earnings and profits of $909,671.49.

24. The Comptroller of the Riggs Bank, prior to the close of business October 1, 1954, drew a cashier’s check in the amount of $450,000 payable to the trust department of the Riggs Bank. The check was delivered by the comptroller of the Riggs Bank to the senior trust officer of the Riggs Bank, who desposited it that day in the American Security and Trust Company to the credit of the trust department of Riggs Bank. Prior to the close of business October 1,1954, the $450,000 cashier’s check was debited to the profits and loss account on the general ledger of the Riggs Bank.

25. The $450,000 to be paid the shareholders of the Trust Company ($4.50 per share) under the terms of the Agreement of Consolidation represents a total of the $75,000 imbalance of .27 per cent in favor of the Riggs Bank shareholders and $375,000, i. e., .75 per cent of the $50,000,000 deposits in the Trust Company on August 13, 1954.

26. The Riggs Bank on August 30,1954, advised its shareholders by letter that—

* * * After providing for the cash payment * * * in the amount of $450,000, Riggs will contribute * * * 82.49% of the total value of acceptable assets * * * being contributed by both consolidating banks, * * *

and

* * * a shareholder of the Trust Company owning 8 shares of its stock would receive 1 share of stock of the Consolidated Bank having a value as of August 13, 1954, of $386.64. In addition, he would receive $36 in cash (being 8 times $4.50) making a total value of $422.64, which, when divided by 8 equals 'a value as of August 13,1954 equivalent to $52.83.

■ 27. The Trust Company on August 30, 1954, advised its shareholders that—

* * * The Riggs National Bank would contribute 82.49% and The Washington Loan and Trust Company 17.51% [of the net contribution of adjusted book value net worth of $28,031,272.00 to the Consolidated Bank].

28. Each of the letters to the shareholders contained the following statement on the printed “Statements of Assets and Liabilities as of August 13, 1954”—

Allowance has been made * * * for the $450,000.00 to be placed in trust immediately prior to the consolidation by The Riggs National Bank for payment to The Washington Loan and Trust Company shareholders of $4.50 per share as provided under the terms of the Agreement of Consolidation.

29. If the $450,000 had not been excluded from the net contribution of the Riggs Bank or if the $450,000 had been included among such assets, the contribution of the Riggs Bank would have been 84.09 per cent of the assets of the consolidated bank rather than 82.49 per cent. The contribution of the shareholders of the Trust Company to such assets would have been 15.91 per cent rather than 17.51 per cent.

30. The letters to the shareholders dated August 30, 1954, were reviewed by the office of the Comptroller of the Treasury prior to the date they were released. The question of the computation of the contribution of the shareholders of the two banks was discussed in detail with the Comptroller prior to the issuance of his letter of approval dated September 1,1954.

31. As of the close of business at 2 p. m. Friday, October 1,1954, the profit and loss account of the Riggs Bank showed a balance of $2,856,209.72.

32. In the Report of Condition of the Riggs Bank at the close of business October 1, 1954, made to the Comptroller of the Currency (form 2130A) in capital accounts under undivided profits is the sum of $2,923,420.57 which is the combined total of the net profit and loss of $2,856,209.72 and of net earnings of $67,210.85.

33. In the Report of Condition of the Trust Company at the close of business October 1, 1954, made to the Comptroller of the Currency (form 2130A) in capital accounts under undivided profits is the sum of $909,671.49.

34. At the organization meeting of the consolidated bank held at 2:15 p. m., October 1, 1954, after the close of business of the Riggs Bank and of the Trust Company, the board of directors caused the sum of $250,000 to be transferred from the profit and loss (undivided profits) account of the consolidated bank to the capital account of the consolidated bank to make the capital account of the consolidated bank equal $7,250,000, in accordance with the Agreement of Consolidation.

35. In the Report of Condition of the consolidated bank after consolidation as of October 1,1954, made to the Comptroller of the Currency (form 2130A) in capital accounts under undivided profits is the sum of $3,583,092.06. This sum is the total of undivided profits of the Riggs Bank prior to consolidation in the amount of $2,923,420.57 and undivided profits of the Trust Company prior to consolidation in the amount of $909,671.49, less the $250,000 transferred at the organization meeting of the consolidated bank from the undivided profits account to the capital account.

36. The assets of the consolidated bank did not include the $450,000 paid by the Riggs Bank and credited to the trust department of the Riggs Bank prior to consolidation.

37. The $450,000 paid by the Riggs Bank to the trust department of the Riggs Bank prior to the consolidation came from the profit and loss account of the Riggs Bank.

38. The plaintiff surrendered his 450 shares of Trust Company stock and received 56 shares of the capital stock of the consolidated bank, a trustees’ certificate of participation evidencing the plaintiff’s right to receive %ths share of the consolidated bank’s stock, and $2,025 in cash.

39. The value of the shares received was in excess of the basis of stock given in exchange and the plaintiff reported the $2,025 cash as a long-term capital gain in his 1954 individual income tax return.

40. In letters dated September 10,1954, and May 17,1955, in response to requests from counsel for plaintiff for a ruling as to the taxability of the cash received by the shareholders of the Trust Company, the Commissioner of Internal Revenue ruled that the cash received had the effect of a distribution of a dividend.

41. On September 24, 1955, the Commissioner assessed a deficiency against the plaintiff in the amount of $210 by excluding the long-term capital gain and including the cash of $2,025 as a taxable dividend. On December 21, 1955, the plaintiff paid under protest the deficiency of $210 with interest in the amount of $5.55.

42. On August 20, 1956, the plaintiff filed a claim for refund for the year 1954 for an overpayment of $210 of income tax and $5.55 interest, alleging that the cash received constituted a capital gain within the purview of Section 356 (a) (1) (B) of the Internal Revenue Code of 1954. By registered letter dated January 9, 1957, the District Director of Internal Revenue at Baltimore, Maryland, gave notice of the disallowance of that claim for refund.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed. 
      
       “That any bant incorporated under the laws of any State, or any bank incorporated in the District of Columbia, may be consolidated with a national banking association located in the same State, county, city, town, or village under the charter of such national banking association on such terms and conditions as may be lawfully agreed upon by a majority of the board of directors of each association or bank proposing to consolidate, and which agreement shall be ratified and confirmed by the affirmative vote of the shareholders of each such association or bank owning at least two-thirds of its capital stock outstanding, * * *. upon such a consolidation, » * *, the corporate existence of each of the constituent banks and national banking associations participating in such consolidation shall be merged into and continued in the consolidated national banking association and the consolidated association shall be deemed to be the same corporation as each of the constituent institutions. All the rights, franchises, and interests of each of such constituent banks and national banking associations in and to every species of property, real, personal, and mixed, and choses in action thereto belonging, shall be deemed to be transferred to and vested in such consolidated national banking association without any deed or other transfer; * *
     
      
       What toot place was not a sale, but was a consolidation with an exchange of stock and payment of cash. The consolidation was under the authority of section 3 of the National Banking Act, supra, and a consolidation pursuant thereto is not a sale. United States v. Seattle Bank, 321 U.S. 583 (1944). Section 368 of the 1954 Code includes a consolidation within the definition of a “reorganization”, and a reorganization such as the one in this case receives the special tax treatment provided for in § 356(a) (1) or (2).
     
      
       “§ 356. Receipt of additional consideration.
      “(a) Gain on exchanges.
      “(1) Recognition of gain.
      “If—
      “(A) section 354 * * * would apply to an exchange hut for the fact that
      “(B) the property received in the exchange consists not only of property permitted by section 354 * * * to be received without the recognition of gain but also of other property or money,
      then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
      “(2) Treatment as dividend.
      “If an exchange is described in paragraph (1) tut has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.” [26 U.S.C., 1952 ed„ Supp. II, § 356.] [Emphasis supplied.]
     