Hearn v. Commissioner

CORNELIUS HEARN, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EDWIN WEISL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hearn v. Commissioner

Docket Nos. 9660, 9661.

United States Board of Tax Appeals

10 B.T.A. 262; 1928 BTA LEXIS 4160;

January 26, 1928, Promulgated

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1. Where a partnership, of which the petitioners are members, purchases capital stock of a corporation together with a stock dividend that has been theretofore declared but has been uncollected by the stockholder of record at the date of declaration thereof, that dividend stock is not such a dividend as to bring it within the provisions of section 31(b) of the Revenue Act of 1916, nor do the petitioners "stand in the shoes" of the stockholders of record at the time of the declaration of such dividend.

2. The basis used by the respondent in determining gain on the sale of certain stock approved.

M. D. Kopple, Esq., for the petitioners.

M. E. McDowell, Esq., for the respondent.

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MORRIS

These proceedings are for the redetermination of deficiencies in income tax of $991.57, $6,920.71, and $5,824.51 asserted against Cornelius Hearn, Jr., and $1,409.95, $7,122.16, and $17,437.45 asserted against Edwin Weisl for the calendar years 1919, 1920, and 1921, respectively.

The issues in both petitioners' cases being identical, they were, upon motion of counsel, consolidated for hearing and decision.

The allegations of error are:

1. In respect to the said preferred stock of the International Paper Co. acquired by the partnership in 1919, 1920, and 1921, the respondent refused to allow said partnership and the petitioners to stand in the shoes of the stockholders of record at the time of the declaration of such dividend, and

2. Refusal of the respondent to allow the partnership of Edwin Weisl & Co., of which petitioners are members, the exemption provided in section 31(b) of the Revenue Act of 1916, on certain stock dividends declared by the International Paper Co., and

3. The action of the respondent in adding to the income of the petitioners additional income for the years 1918, 1919, and 1920, based upon the deduction by the respondent of the value of said stock dividend from the cost to the partnership aforesaid of the stock upon which that dividend was declared.

FINDINGS OF FACT.

The following facts were agreed upon and evidenced by written stipulation between the parties:

The petitioners are individuals and are members of the firm of Edwin Weisl & Co., with their principal office at 25 Broad Street, New York City.

Prior to the first day of June, 1917, the International Paper Co., by a resolution duly adopted by its board of directors, declared a dividend on its preferred stock payable June 1, 1917, of 7 1/2 per cent cash and 14 per cent in preferred stock and 12 per cent in common stock.

On the first day of June, 1917, the International Paper Co. had a surplus derived from earnings which had accrued prior to March 1, 1913, in an amount at least equal to the par value of said stock dividends.

In the resolution of the board of directors of the International Paper Co. declaring such dividend it was provided "that the Common and Preferred stock issued on account of such accrued dividend shall be charged against the surplus of the Company derived from earnings which had accrued prior to March 1, 1913."

The preferred and common stock issued as a stock dividend pursuant to such resolution were in fact charged against the surplus of the International Paper Co. accrued prior to March 1, 1913.

By the said resolution of the board of directors of the International Paper Co. provision was made that upon payment of said stock and cash dividend there should be stamped, printed or engraved upon the certificates of preferred stock upon which such dividends should be paid, a statement in the following form, "all deferred dividends accrued prior to October 1, 1916, paid in full."

In the years 1919 to 1921, inclusive, Edwin Weisl & Co., a copartnership of which the petitioners were members, purchased 3,976 shares of the preferred stock of the International Paper Co. which had been issued and outstanding prior to June 1, 1917, but upon which the dividend of stock and cash payable June 1, 1917, had not been collected or paid. This stock was known as "unstamped" to distinguish it from the stock upon which the dividend had been collected and paid and which bore the endorsement set forth hereinabove and was denominated "stamped."

After the purchase of such unstamped stock said Edwin Weisl & Co. received and collected the dividends of preferred and common stock and cash to which they were entitled upon said stock so purchased and had their certificates stamped as set out hereinabove.

The petitioners did not include in their income-tax returns for the years 1919, 1920, or 1921 or either of them, such stock dividends so received as being income in any one of those years.

The Commissioner of Internal Revenue, through the supervising internal revenue agent at New York, N.Y., made an investigation of the books of account and records of Edwin Weisl & Co. for the years 1919, 1920, and 1921, and the said supervising internal revenue agent made a report finding that the net income of Edwin Weisl & Co. should be increased for the three-month period ending December 31, 1919, in the sum of $8,913.50 over and above that disclosed by the return made out, and that the distribution of income therefrom was, Edwin Weisl, $27,108.71, and Cornelius Hearn, Jr., $27,108.71; and further found that the net income of said Edwin Weisl & Co. for the year ended December 31, 1920, should be increased by the sum of $35,479.06 over the net income as disclosed by its return and that the distributive share thereof was, Edwin Weisl, $72,545.21, and Cornelius Hearn, Jr., $65,918.30; and further found that the net income of said Edwin Weisl & Co. for the year 1921 should be increased by the sum of $79,334.51 over the net income disclosed by its return, and that the distributive share thereof was, Edwin Weisl, $80,635.02, Cornelius Hearn, Jr., $40,317.51; and the said supervising internal revenue agent based such findings upon the deduction of the value of such stock dividend from the cost price of said stock, this deduction not having been made by Weisl & Co., thereby increasing the income of Edwin Weisl & Co. upon the sale of such preferred stock (now "stamped") by an amount equal to the value of the stock dividend.

On the 17th day of October, 1925, the Commissioner of Internal Revenue sustained the findings of said supervising internal revenue agent by a letter in the following words:

The partnership was not a stockholder of record as of June 1, 1917, and therefore, was not entitled to the receipt of the accumulated dividends nor was it entitled to the benefits on declaration of such dividends. It is noted that in the purchase of the unstamped stock a certain amount represented a purchase of accumulated dividends which were actually due the stockholder of record at June 1, 1917, only; that the difference in the price between the stamped and unstamped stock represented the cost of these accumulated dividends.

The computations submitted by the Revenue Agent to eliminate from the purchase account that portion of the stock of the unstamped stock which was deened to represent the cost of the accumulated dividends, has been approved by this office.

and therewith rendered to the petitioners a statement based upon such computations and findings of the revenue agent, as follows:

STATEMENT.
IT:PA:2
AAR-207-60D	OCTOBER 17, 1925.
In re: Cornelius Hearn, Jr., % Edwin Weisl & Co., 25 Broad street, New York, N.Y.
1919 - Deficiency in tax	$991.57
1920 - Deficiency in tax	6,920.71
1921 - Deficiency in tax	5,834.51
Total	$13,736.79

STATEMENT.
IT:PA:2
AAR-207-60D	OCTOBER 17, 1925.
In re: Edwin Weisl, 25 Broad Street, New York, N.Y.
1919 - Deficiency in tax	$1,409.25
1920 - Deficiency in tax	7,122.16
1921 - Deficiency in tax	17,437.45
Total	$25,969.56

The determination of deficiency in tax contained in the deficiency letter is based upon such report of the supervising internal revenue agent as sustained by the Commissioner, as above set forth.

OPINION.

MORRIS: While there are three separate and distinct allegations of error set forth in the petition, the counsel for both parties have incorporated in a stipulation entered into between them the only question presented for the consideration of the Board. That stipulation reads:

The only question to be submitted to the United States Board of Tax Appeals is whether or not Edwin Weisl & Company succeeded to the rights of and stood in the shoes of the preferred stockholders of the International Paper Company as of June 1, 1917 in respect to the unstamped preferred stock as acquired by said Edwin Weisl & Company in the years 1919, 1920 and 1921, and whether an amount equal to the value of such stock dividend so declared by said International Paper Company was taxable to the partners of Edwin Weisl & Company in the years 1919, 1920 and 1921, and whether the same was exempt from taxation under the provisions of Section 31(b) of the Revenue Act of 1916, as added by Section 1211 of the Revenue Act of 1917.

At some time prior to June 1, 1917, the International Paper Co. declared a stock and cash dividend on its preferred stock out of earnings accrued prior to March 1, 1913. It was provided in the resolution of the board of directors of that company that upon payment of those dividends there should be stamped on the certificates upon which such dividends were to be paid a statement to this effect: "All deferred dividends accrued prior to October 1, 1916, paid in full." In 1919, 1920, and 1921 the partnership of Edwin Weisl & Co., of which the petitioners were members, purchased 3,976 shares of the preferred stock of that company which had been issued prior to June 1, 1917, on which the aforesaid dividend was due, together with the said dividends that had been declared but had not been collected by the stockholder of record at the date of declaration. The stock so purchased was known as "unstamped" to identify those shares upon which the dividends had not been paid. Later the partnership collected the dividends which had been declared and which it acquired with the 3,976 shares of stock purchased by it. Upon the receipt of those dividends the petitioners excluded them from their income-tax returns. The respondent made an examination of the books of account of the partnership for the years 1919, 1920, and 1921, and found that certain stock of the International Paper Co. had been sold, and in determining the profits from said sale he adjusted the cost price of that stock by the value of the stock dividends received by the partnership. Therefore, it will be readily seen that the respondent did not tax the amounts of stock dividends to the petitioners as such, but adjusted the cost of the stock upon which the dividend was declared in determining the gain from its subsequent sale.

The petitioner invokes the provisions of section 31(b) of the Revenue Act of 1916 as added by section 1211 of the Revenue Act of 1917, and similar provisions of the later acts, as authority for the contentions urged here. Those sections apply strictly to dividends, as such, and therefore since the income in question has not been taxed as dividends, we do not see the applicability of those provisions.

Reverting to the stipulated question presented to the Board for consideration, we have first to say that we do not consider that Edwin Weisl & Co. "succeeded to the rights of and stood in the shoes of the preferred stockholders of the International Paper Company as of June 1, 1917." Dividends are declared and are payable to stockholders whose names appear in the books of a corporation as of a given date. The stockholder in this case on June 1, 1917, was the vendor of the 3,976 shares of stock to the partnership and to him the stock distribution of the International Paper Co. was a dividend and, therefore, entitled to all the benefits of section 31(b) supra. However, when the partnership of Weisl & Co. purchased those shares of stock it also purchased the dividend stock then owned by the vendor, which had not been collected, and that stock thereupon lost its identity as a dividend and had the same status thereafter for tax purposes as any other stock purchased by a taxpayer.

In the case of ; certiorari denied by the United States Supreme Court, October 10, 1927, ; the plaintiff owned, in the year 1917, 1,800 shares of capital stock of the Bethlehem Steel Corporation on which that company declared a stock dividend of 200 per cent; and in February, 1917, the plaintiff received from that corporation 3,600 shares as his proportion of said stock dividend. Within that same year the plaintiff sold the 3,600 shares of said dividend stock. The plaintiff contended that the income resulting from the sale in 1917 of the stock received as a 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. The Government, on the other hand, contended that the income resulting from the sale of that stock was not the receipt of a dividend but was gain or profit derived from the sale of stock and that section 31 of the Act of 1916 as amended was inapplicable. 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, applying the 1917 rates. The Commissioner was sustained by the court in his method of computation. The court said, "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." See also .

We are, therefore, of the opinion that Edwin Weisl & Co. did not succeed to the rights of the stockholder of the International Paper Co. as of June 1, 1917, in respect to the preferred stock acquired by said Edwin Weisl & Co. in the years 1919, 1920, and 1921.

With respect to the question of whether an amount equal to the value of such stock dividends was taxable to the partners of Edwin Weisl & Co. in the years 1919, 1920, and 1921, we have already stated that the dividend was not taxed by the respondent as such, but was used for the purpose of determining the profit of the International Paper Co. stock on resale.

We are, therefore, of the opinion that the respondent was correct in holding that the partnership was not a stockholder of the International Paper Co. as of June 1, 1917, and therefore not entitled to the benefits of the taxing statutes with respect to dividends, and that he was correct in reducing the base for the purpose of determining profit on the resale of that stock.

It will be noted that the third allegation of error herein refers also to the year 1918. Since the deficiency notice appealed from includes only the years 1919, 1920, and 1921, our opinion affects only those years.

Judgment will be entered for the respondent.