
    CUBA RAILROAD COMPANY v. THE UNITED STATES
    [No. D-41.
    Decided January 26, 1925]
    
      On the Proofs
    
    
      Internal revenue; tax on capital stoeh. — The issue and exchange of stock of no par value for common stock of the par value of $100 per share then outstanding, held by one person, adds nothing to and takes nothing from the capital of the issuing company, and is not an original issue within the meaning of section 1100 of the revenue act of 1921, and is not subject to the stamp tax.
    
      
      The Reporter’s statement of the case :
    
      Mr. William M. Williams for the plaintiff. Williams, Meyers <& Quiggle were on the briefs.
    
      Mr. Chester A. Gwirm, with whom was Mr. Assistant Attorney General Robert E. Lovett, for the defendant. Messrs. Roseoe R. Kooh and Nelson T. Hartson were on the brief.
    The following are the facts as found by the court:
    I. Plaintiff, the Cuba Eailroad Company, is a corporation organized under the laws of the State of New Jersey, having its principal office at 83 and 85 Montgomery Street, Jersey City, New Jersey, and doing business in the island of Cuba. Prior to June 27,1923, there were outstanding 158,000 shares of the authorized issue of 200,000 shares of the common stock of the plaintiff of a par value of $100 per share, and 100,000 shares of its preferred stock of a par value of $100 per share.
    By resolution of the board of directors of the plaintiff dated April 25, 1923, and by resolution of the stockholders of the plaintiff dated June 27, 1923, it was voted that the authorized common stock of the plaintiff, then consisting of 200,000 shares of the par value of $100 each, be changed into stock without par value, and that the number of shares of the common stock without par value which the plaintiff should be authorized to issue be 1,000,000 such shares. It was further voted by the said resolution of the stockholders that the plaintiff issue 500,000 shares of said common stock without par value to the Cuba Company, a corporation organized and existing under the laws of New Jersey, in exchange for 158,000 shares of the common stock of par value then issued and outstanding and owned by said The Cuba Company.
    Pursuant, to said resolutions the certificate of incorporation of the plaintiff was amended on June 27, 1923, so as to authorize the issuance by plaintiff of one million shares of common stock without nominal or par value.
    
      Article IY of the certificate of incorporation of the plaintiff was thereby amended so as to read in full as follows:
    “ IY. The amount of the total authorized capital stock of the corporation is ten million dollars ($10,000,000) of preferred stock consisting of one hundred thousand (100,000) shares of the par value of one hundred dollars ($100) each, and one million (1,000,000) shares of common stock without nominal or par value.
    “The holders of both the preferred and common stock shall be entitled to one vote in respect to each share of either class of said stock held by them at any annual or special meeting of the stockholders of the corporation.
    “The corporation may issue and sell all or any part of five hundred thousand (500,000) of such additional authorized shares of such common stock without par value, from time to time, for such consideration as from time to time may be fixed by the board of directors.
    “ The holders of such preferred stock shall be entitled to receive from the net profits arising from the business of said corporation in each fiscal year, after reservation of such sum, if any, as shall have been fixed as a working capital, as provided in the certificate of incorporation of said corporation, a noncumulative dividend up to, but not exceeding, six per cent on the par value of their stock, payable quarterly, half-yearly, or yearly, as shall be determined by the directors or provided by the by-laws of said corporation, before any dividend shall be set apart or paid on the common stock, and upon the dissolution of said corporation or the final distribution of its assets, after payment of its debts, shall be entitled to payment out of said assets to the amount of the par value ■ of such preferred stock, before any division or payment to the holders of the common stock.
    “The holders of such common stock shall be entitled to receive all dividends declared from the net profits arising from the business of said corporation in any fiscal year after a dividend to the amount of six per cent on all the outstanding preferred stock of said corporation from the net profits of such year shall have been declared and paid or set aside, and upon the dissolution of said corporation or the final distribution of its assets, after payment to the holders of all the preferred stock out of said assets to the amount of the par value of their stock, shall be entitled to the remaining assets of said corporation proportionally according to their respective shares.”
    Article XY? -at and before the time it was amended, read as follows:
    
      “ IY. Tbe amount of the total authorized capital stock of the corporation is thirty million dollars ($30,000,000). The number of shares into which the same is divided is three hundred thousand (300,000) and the par value of each share is one hundred dollars ($100).
    “Of such total authorized capital stock, one hundred thousand shares (100,000), amounting to ten million dollars ($10,000,000), shall be preferred stock, and two hundred thousand shares (200,000), amounting to twenty million dollars ($20,000,000), shall be common stock.
    “ The holders of such preferred stock shall be entitled to receive from the net profits arising from the business of said corporation in each fiscal year, after reservation of such sum, if any, as shall have been fixed as a working capital, as provided in the certificate of incorporation, a noncumulative dividend up to but not exceeding, six per cent (6%) on the par value of their stock, payable quarterly, half-yearly, or yearly, as shall be determined by the directors or provided by the by-laws of said corporation, before any dividend shall be set apart or paid on the common stock, and, upon the dissolution of said corporation or the final distribution of its assets, after payment of'its debts, shall be entitled to payment out of said assets to the amount of the par value of such preferred stock, before any division or payment to the holders of the common stock.
    “The holders of such common stock shall be entitled to receive all. dividends declared from the net profits arising from the business of said corporation in any fiscal year after a dividend to the amount of six per cent (6%) on all the outstanding preferred stock of said corporation from the net profits of such year shall have been declared and paid or set aside, and upon the dissolution of said corporation or the final distribution of its assets, after payment to the holders of all the preferred stock out of said assets to the amount of the par value of their stock, shall be entitled to the remaining assets of said corporation proportionally according to their respective shares.”
    II. Pursuant to the authority aforesaid there were issued by the plaintiff 500,000 shares of common stock of no par value in exchange for the 158,000 shares of common stock of the par value of $100 per share then outstanding. The remaining 500,000 shares of common stock, no par value, authorized by .said amendment to the certificate of incorporation of the plaintiff have not been issued.
    
      III. On August 16,1923, written request was made by the plaintiff to the Commissioner of Internal Eevenue for a ruling as to whether the issue of the 500,000 shares of no-par-value stock of the plaintiff in exchange for the said 158,000 shares of its outstanding par-value .stock was subject to the stamp tax as provided for by Schedule A-2, Title XI, of the revenue act of 1921. On August 22, 1923, plaintiff was notified by letter, signed by M. F. Sinder, Acting Deputy Commissioner of Internal Eevenue, that the said entire issue of stock without nominal or par value in exchange for the par-value shares outstanding was subject to said stamp-tax provisions of the act.
    IV. Thereafter, on or about the 28th day of August, 1923, the plaintiff, in order to avoid the imposition of penal-ti s against it and the distraint of its property, purchased, under protest, from the collector of internal revenue at New York, N. Y., documentary stamps in the amount of $10,000 and u,sed and canceled the said stamps in the issue of the above-mentioned 500,000 shares of common stock without nominal or par value issued in exchange for said 158,000 shares of the par value of $100 each.
    On or about August 29, 1923, a claim for the redemption of said stamps and the refund of the amount paid therefor was filed by the plaintiff with the collector of internal revenue at New York, N. Y. By letter dated September 29, 1923, signed by D. H. Blair, Commissioner of Internal Eevenue, plaintiff was notified that its .said claim for the redemption of said documentary stamps and the refund of the amount paid therefor was rejected.
    Said decision and rejection were based on Schedule A-2, Title XI, of the revenue act of 1921, which provides:
    “2. Capital stock, issued. — On each original issue, whether on organization or reorganization, of certificates of stock, or of profits, or of interest in property or accumulations, by any corporation, on each $100 of face value or fraction thereof, 5 cents: Provided, That where a certificate is issued without face value, the tax shall be 5 cents per share, unless the actual value is in excess of '$100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof, or unless the actual -value is less than $100 per share, in which case the tax shall be 1 cent on each $20 of actual value, or fraction thereof.
    “The stamps representing the tax imposed by this subdivision shall be attached to the stock books and not to the certificates issued.”
    The court decided that plaintiff was entitled to recover.
   Campbell, Ghief Justice,

delivered the opinion of the court:

The Cuba Railroad Company, the plaintiff, is a New Jersey corporation. Its capital stock, amounting to $30,000,-000, was divided into 100,000 shares of preferred and 200,-000 shares of common stock, both of the par value of $100 per share. On and before June 27, 1923,• there had been issued and were outstanding all of the preferred stock and 158,000 shares of the common stock. This outstanding common stock was held by the Cuba Company — a body corporate.

On the date mentioned, June 27, 1923, the plaintiff’s certificate of incorporation was amended so as to provide that its common stock consisting of 200,000 shares each of the par value of $100 should be changed into stock of no par value and that the number of such shares of common stock which the corporation could issue should be 1,000,000 shares. It was also determined that the corporation issue to The Cuba Company 500,000 shares of common stock of no par value in exchange for the 158,000 shares of common stock of the par value of $100 each held by the latter company. The remaining 500,000 shares of the stock of no par value were not issued. The plaintiff was required by the Commissioner of Internal Revenue to affix documentary stamps in the amount of $10,000 in its issue of the 500,000 shares of no par value, and it complied with this requirement under protest and objection. It at once applied for the redemption of the stamps affixed and canceled or refund of the amount of the stamp tax, but its application was denied by the commissioner. This suit is brought to recover the amount paid for the stamps.

The commissioner’s ruling was based upon his construction of the provisions of the revenue act of 1921, Title XI, stamp taxes, section 1100, Schedule A, subparagraph 2 (42 Stat. 301, 303). This section imposes a tax for and in respect of certificates of stock and other matters and things mentioned and described in Schedule A. In this Schedule A appears the following: . .

“ 2. Capital stock, issued: On each original issue, whether on organization or reorganization, of certificates of stock, or of profits, or of interest in property or accumulations, by any corporation, on each $100 face value or fraction thereof, 5 cents: Provided, That where a certificate is issue.d without face value, the tax shall be 5 cents per share, unless the actual value is in excess of $100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof, or unless the actual value is less than $100 per share, in which case the tax shall be 1 cent on each $20 of actual value, or fraction thereof.
“ The stamps representing the tax imposed by- this subdivision shall be attached to the stock books and not to the certificates issued.”

It is apparent that the words “certificates of stock” in section 1100 are not confined to subdivision 2. ' The question therefore turns upon the construction to be given thé language quoted from the act. The plaintiff contends that the transaction wherein 500,000 shares of common stock of no par value were issued to The Cuba Company in exchange for 158,000 shares of common stock of the stated par value of' $100 each theretofore issued was not an “ original issue ” of certificates of stock within the meaning of the áct, and the Government insists that these shares of no par value which were issued were certificates of original issue. It concedes that “not all issues of certificates of capital stock are taxed, but only original issues.” This concession has in view the rule that it is the duty of the court to give effect to all of the words used. Plainly the quoted paragraph confines the stamp tax to original issues. It further specifies original issues, “whether on organization or reorganization.” These latter words are not to be ignored. There is no contention that the no-par-value stock was an original issue on organization.

The insistence for the Government, on the other hand, is that the issue was “ an original issue on reorganization,” the argument being that the phrase whether on organization or reorganization is the exact equivalent of “whether oh orr ganization or reorganization or not,” which does not constitute a limitation upon the operation of the statue' “but broadens it” by eliminating any possible suggestion of a limitation except to original issues. If the interpolation of the words “or not” gives the phrase a broader meaning than it has without them it is manifest that their absence from the act becomes an important element in ascertaining its meaning. Congress could have levied a tax on every issue of certificates of stock or on some issues. It could tax an original issue of any kind of stock or confine the tax to an original issue on organization of the company. When under paragraph 1 of Schedule A corporate securities are taxed provision is made for renewals and these it is provided “ shall be taxed as a new issue.” In the next paragraph the tax is upon the original issue, nothing being said about a “new issue” except the implication that an issue upon reorganization may amount to an original issue. It is established that doubts are to be resolved in favor of the taxpayer. Gould v. Gould, 245 U. S. 151.

There was no change in the corporation’s capital or its property by the exchange of no-par-value stock for outstanding common stock. This common stock was held by, one person and this one person received a greater number of shares of no-par-value stock than he held of the-other stock, but that added nothing to nor did it diminish the capital of the company. We are not required by the facts to determine the effect of a disposition of the 500,000 shares of no par value remaining unissued. Our view that the exchange shown in this case of one kind of stock for another kind of stock is not an original issue of certificates of stock within the intent of the act in question is sustained by the decisions of other courts. See In re Grant-Lees Gear Co., Dist. Court, W. D. Ohio, decided Sept. 6, 1924, 1 Fed. (2d) 898; Bowers, Collector, v. West Va. Pulp & Paper Co., 297 Fed. 225, 293 Fed. 144; Proctor & Gamble v. Deane, 292 Fed. 620; Edwards v. Wabash Ry. Co., 264 Fed. 610.

Judgment should be rendered in favor of the plaintiff for the amount of the stamp tax erroneously or illegally exacted, with interest thereon, as provided by the statute. And it is so ordered.-

Geapiam, Judge; Hay, Judge; DowNey, Judge, and Booth, Judge, concur.  