Case v. Commissioner , 26 B.T.A. 1044 ( 1932 )

THEODORE W. CASE AND JOHN TABER, TRUSTEES, ITEM IV. U/W OF WILLARD E. CASE (DECEASED) BENEFIT OF DOROTHY CASE WHITEHOUSE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Case v. Commissioner

Docket Nos. 49394, 57601.

United States Board of Tax Appeals

26 B.T.A. 1044; 1932 BTA LEXIS 1200;

September 28, 1932, Promulgated

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Stock dividends upon stock held by the petitioners effect a dilution of such shares and thereafter petitioners' capital interest in the corporation is evidenced by a larger number of units or shares. Subsequent dispositions of such shares to the life beneficiary pro rata reduce the petitioners' capital interest in the corporation and the basis for determining gain or loss upon subsequent sales of the stock. The respondent's determination of gain upon the sale of such stock by the petitioners sustained.

John Taber, Esq., for the petitioners.

James K. Polk, Esq., for the respondent.

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SMITH

The Commissioner determined deficiencies in the petitioners' income tax of $9,978.67 for 1927 and $356.45 for 1928.

The only issue for our determination is the amount of gain realized upon the sale of certain shares of stock in the taxable years. The facts were stipulated.

FINDINGS OF FACT.

Pursuant to the provisions of the decedent's will and an order of the Surrogate's Division of the Supreme Court of the State of New York, dated May 26, 1920, certain property, including 217 shares of stock of the American Gas & Electric Company of the value of $15,100.16, and 588 shares of stock of Cities Service Company of the value of $132,632, was transferred to the petitioners as trustees.

Subsequent to the creation of the trust the petitioners received certain stock dividends upon the American Gas & Electric Company and Cities Service Company stocks held by them. Pursuant to an order of the Surrogate's Division of the Supreme Court of the State of New York, the trustees distributed a portion of these stock dividends to the life beneficiary of the trust.

The dates and amounts of the stock dividends received and distributed by the petitioners are as follows:

American Gas & Electric Co. shares
Sept. 1, 1920 (at creation of trust)	217
Stock dividends, 1920	8
Stock dividends, 1922	63
Total	288
1923 - Delivered to Mrs Whitehouse	71
Remaining	217

American Gas & Electric Co. shares
1923 received 5 for 1 (new)	1,085
1923 stock dividends	24
1924 stock dividends	44
1925 stock dividends	624
1926 stock dividends	44
Total	1,821
1926 - Delivered to Mrs. Whitehouse	669
Remaining	1,152
1927 - Delivered to Mrs. Whitehouse	44
Remaining	1,108
1927 stock dividends	517
Total	1,625

Cities Service Co. shares
September 1, 1920 (at setting up of trust funds)	588
Stock dividends, 1921	75
Stock dividends, Feb. 8, 1925	346
Total	1,009
1925 - Delivered to Mrs. Whitehouse	182
Remaining	827
1925 received 5 for 1	4,135
1925 stock dividends	766
1926 stock dividends	196
January 1, 1927, balance	5,097
March, 1927, stock dividends	77
Total	5,174
April 6, 1927 - Delivered to Mrs. Whitehouse	213
Balance	4,961
Further stock dividends 1927	214
Total	5,175

Subsequent to the receipt of the stock dividends and out of the remaining shares on hand after the distributions to the life beneficiary, the petitioners sold for cash shares of these stock as follows:

Stock sold	Year	Shares	Amount received
American Gas & Electric Co	1927	800	$77,193.00
Cities Service Co	1927	200	10,563.40
Cities Service Co	1928	600	33,740.20

The Commissioner computed the profit upon these sales by apportioning the original basis ($15,100.16 for the American Gas & Electric Company stock and $132,632 for the Cities Service Company stock) between the old and new stock, reducing the total basis by the amounts allocable to the shares distributed to the life beneficiary (Mrs. Whitehouse), and apportioning the remainder between the then old stock and the new stock subsequently received as stock dividends.

OPINION.

SMITH: There is no dispute as to the amounts to be used as the original cost or basis for the shares of stock involved in these proceedings at the time the stocks were placed in trust. The petitioners contend that the distribution of the stock dividends to the life beneficiary did not affect the basis and that such distributed stock should be ignored in computing the profit realized by the petitioners upon the sales in question, since under New York law the "stock dividends which represent earnings of the corporation subsequent to the creation of the trust are the property of the life tenant, while those that were earned prior to the creation of the trust are the property of the corpus of the trust fund," citing decisions of the New York courts, and arguing that this Board is bound thereby.

While the property rights of individuals within the jurisdiction of the State of New York are determined by its laws, such laws "are not ultimately decisive in Federal income-tax matters." . See also ; ; ; ; affd., .

The stock dividends were numerical readjustments of evidences of the same ownership of the petitioners' interest in the corporations which the old shares indicated immediately before the declaration of the stock dividends. See . The stock dividends effected a dilution of the shares outstanding. . Thereafter the cost basis per share was proportionately reduced, and subsequent dispositions of the stock reduced the petitioners' capital interest in the corporations. To illustrate - the petitioners originally held 217 shares of the American Gas & Electric Company stock, the basis upon which to determine gain or loss is agreed at $15,100.16; stock dividends in 1920 and 1922 increased the number of shares to 288, which then had a basis of $15,100.16, or $52.43 per share. The petitioners delivered 71 of these shares to Mrs. Whitehouse, thereby reducing the capital interest of the trust by the basis allocable to the 71 shares, or $3,722.53, and thereafter its capital interest was represented by 217 shares having a basis of $11,377.63, or $52.43 per share. The 1923 exchange of one share of old stock for five shares of new stock did not reduce the total basis for the petitioners' capital interest in the corporation, but did reduce the per share basis to $10.49 for the 1,085 shares then held. Subsequent stock dividends increased the number of shares held to 1,821 and proportionately decreased the per share basis to $6.25. The delivery to Mrs. Whitehouse of 669 of the shares held in 1926 reduced the basis of the total capital interest of the trust by the amount of the basis allocable to the 669 shares, or $4,181.25, and thereafter that capital interest had a basis of $7,196.38, represented by 1,152 shares of stock with a per share basis of $6.25. The delivery in 1927 of 44 shares of this stock further reduced the basis of the petitioners' capital interest to $6,921.38, which was then represented by 1,108 shares of stock. The total basis was not affected by the 1927 stock dividend of 517 shares, which increased the number of the petitioners' shares to 1,625, but the per share basis was reduced to $4.26. The petitioner thereafter sold 800 shares, which had a basis of $4.26 per share, or a total basis of $3,408, for $77,193. The realized profit is manifestly the difference between these two sums. The respondent has computed the profits upon the several sales in like manner and his determinations are sustained. See ; ; .

Judgment will be entered for the respondent.