Bryan v. Commissioner , 20 B.T.A. 573 ( 1930 )

JOHN STEWART BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. ST. GEORGE BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DOUGLAS S. FREEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALLEN POTTS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HELEN H. BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ISOBEL S. BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HELEN M. BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

NORMA S. BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THOMAS PICKNEY BRYAN 2D, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALEXANDER H. BRYAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bryan v. Commissioner

Docket Nos. 37411-37420.

United States Board of Tax Appeals

20 B.T.A. 573; 1930 BTA LEXIS 2089;

August 14, 1930, Promulgated

---

In the circumstances herein the petitioners are not liable for surtaxes on amounts received incident to the redemption by a corporation of a portion of its capital stock, even though stock dividends and rights were thereafter issued by which each stockholder became entitled to an equal or greater amount of stock than that redeemed.

R. E. Cabell, Esq., for the petitioner.

B. M. Coon, Esq., for the respondent.

---

LANSDON

The respondent has asserted deficiencies in income tax for the calendar year 1923 against each of the several petitioners in the respective amounts of $55,618.55, $9,096.28, $584.95, $297.95, $1,169.44, $38.13, $38.13, $38.13, $38.13, and $38.13. The only issue involved is whether certain payments received from a corporation by each of the petitioners in the taxable year were dividends, subject to surtax, or a return of capital incident to the retirement of certain shares of capital stock. By agreement of the parties the several proceedings, each involving the same issue, were consolidated for hearing and decision.

FINDINGS OF FACT.

All of the several petitioners are individuals residing at Richmond, Va. , and at all times material here were beneficial owners of capital stock of the News Leader Co., a Virginia corporation, hereinafter designated the Company, which was organized in 1879 with authorized capital stock, common, of $100,000, divided into 1,000 shares of a par value of $100 each. From time to time the charter of the company was amended and the authorized capital increased so that at April 1, 1920, the authorized capital stock consisted of 2,000 shares of common and 3,000 shares of preferred.

The preferred stock was all issued June 1, 1920, and was subscribed and paid for in cash by the then owners of the common stock in proportion to the holdings thereof. The issue of the preferred stock was necessary on account of a business emergency resulting from the high price of print paper. It was nonvoting, cumulative, with a fixed dividend of 8 per cent per annum and was retirable by the company at par at any time after three years from the date of its issue.

The Company was highly prosperous in 1920 and 1921. Early in 1922 its cash situation was such that the funds realized from the sale of preferred stock, June 1, 1920, were no longer needed. The subscribers for such stock were anxious to have it retired and to recover the money paid therefor, since they had taken it not as a permanent investment, but solely to relieve the emergency in which the company found itself early in 1920.

Early in April, 1922, the president of the Company told its general counsel that the stockholders desired the retirement of the preferred stock and that the cash resources of the Company were ample for that purpose. The general counsel then called attention to the provisions of the amended charter that such stock could only be retired after the lapse of three years from the date of its issue. After consultation with the corporation commission of Virginia, the general counsel advised that the desired retirement could be effected by the conversion of the preferred stock into common stock in conformity with section 3792 of the laws of Virginia, and the subsequent purchase by the company of the shares of common stock received by the stockholders in exchange for their preferred stock. This plan was adopted and in April, 1922, the charter of the company was amended by adding to the appropriate section thereof this clause: "The holder of any share of preferred stock shall have the right at any time to convert such preferred stock into the common stock of the corporation on the basis of share for share at par." Shortly thereafter all the owners of preferred stock notified the company that they desired to exchange their holdings for common stock and such exchanges were duly made. On January 31 or February 1, 1923, pursuant to a corporate resolution, the Company paid each of its stockholders $100 per share for the common stock that had been received for the 3,000 shares of preferred stock. The stockholders endorsed their stock certificates to the company and the same were canceled. Thereafter, a single certificate for 3,000 shares was issued to the company, taken into its treasury, and charged to a stock investment account.

Early in 1923, the labor employed by the company became dissatisfied with the prevailing wage scales and made demands for increased wages. Labor leaders pointed to the great profits realized on a capital investment represented by 2,000 shares of stock and insisted that employees were entitled to a larger share of the company's earnings. About the same time the business manager found difficulty in increasing or even in maintaining advertising rates. Patrons of the paper contended that the company was earning profits out of proportion to its invested capital. On account of these conditions the business manager recommended and urged that the stock of the company should be increased to represent something like the actual value of the assets used in the business. After some consideration and discussion the company decided to adjust its capital structure by the declaration of stock dividends to be charged against surplus.

On March 20 and June 2, 1923, by proper corporate action, the company declared dividends in the amount of 100 per cent and 25 per cent of the stock outstanding at such respective dates and provided for the payment thereof by the issue of the 3,000 shares of the common stock acquired by purchase from its stockholders in February of that year. On July 5, 1923, the company declared a cash dividend in the amount of 5 per cent of the then outstanding stock. In November, 1923, with the approval of the State Corporation Commission of Virginia, the Company increased its authorized capital to $1,000,000 and sold the 5,000 shares representing such increase to the then beneficial owners of its stock at $14 per share.

The Company is a family corporation, and in the taxable years all the stock, except a small number of shares owned by two members of the operating staff, was held by members of the Bryan family. Its only business is the publication of the News Leader, an evening newspaper which is an offshoot of the same paper established in 1877 by the founder of the property, who was the father of John Stewart Bryan, J. St. George Bryan, and Thomas P. Bryan, deceased. The founder invested more than $700,000 in the property before it made any substantial return. In the taxable year the company owned and used a building erected by it at a cost of $386,000, had machinery and equipment that had cost about $300,000, and land that cost $80,000. In that year the actual value of its tangible property was at least $1,000,000, and its intangible assets represented by good will and circulation structure had great value.

Upon the income-tax returns of the several petitioners for the taxable year, the Commissioner determined that, in the circumstances set forth above the payment of $300,000 to the stockholders on January 31 or February 1, 1923, constituted, in effect, a distribution of dividends and asserted the deficiencies in surtax that are in controversy here.

OPINION.

LANSDON: The petitioners allege that certain amounts received from a corporation in 1923, which the respondent has held taxable as dividends, constitute a return of capital incident to the redemption of common stock. The controversy arises not from a dispute over the facts, but from different interpretations thereof and of the applicable provisions of the revenue act. Section 201(d) of the Revenue Act of 1921 provides:

A stock dividend shall not be subject to tax but if after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation after February 28, 1913.

In the Revenue Act of 1924 the above provision was amended by inserting "before or" in the first line so that the clause reads "but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock * * *." The Revenue Act of 1921 was in force and effect during the taxable year and the question presented in this proceeding must be determined in strict accordance with its provisions. The Company issued no stock dividends prior to the redemption of a part of its capital stock on February 1, 1923, and there has been no redemption of stock after the distribution of stock dividends on March 20 and June 2, 1923. We think section 201(d) is not applicable to the facts of the instant proceeding.

The questions arising with reference to the taxability of distributions by a corporation are discussed at some length in , where it is held that in so far as a distribution represents the return of capital it shall be free from tax. See also ; ; and .

If the respondent's interpretation of the facts is to be sustained we must find that the redemption of 3,000 shares of common stock in February, 1923, and the issuance of stock dividends on March 20 and June 2, 1923, were for taxation purposes one single transaction. The evidence adduced will not support such a conclusion. Several officers and directors of the Company, who were called as witnesses for the petitioners, testified that at the time the Company determined to redeem a portion of its capital stock there was no thought of increasing the capital structure or distributing stock dividends; that the 3,000 shares of stock were redeemed for cash about the first of February, 1923; and that stock dividends were thereafter declared and paid in order to bring the capital structure of the company more nearly in line with the actual value of its assets. Their testimony, which is clear and uncontradicted, convinces us that these transactions were separate and distinct, one having no relation to the other.

Decision will be entered for the petitioner.