Ziliox v. Commissioner

SAM F. ZILIOX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

KATHRYN R. ZILIOX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Ziliox v. Commissioner

Docket Nos. 22515, 22516.

United States Board of Tax Appeals

19 B.T.A. 679; 1930 BTA LEXIS 2344;

April 24, 1930, Promulgated

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1. Where a corporation conveys part of its assets in exchange for stock of a par value equal to the book value of the property sold, and subsequently distributes the stock so acquired among its stockholders as a dividend, the distribution constitutes taxable income to the stockholders.

2. The dividend was unqualifiedly made subject to the demand of Kathryn R. Ziliox in 1921 and is taxable to her in that year and not 1922, the year in which she actually received it.

Joseph Getz, Esq., for the petitioners.

Harold Allen, Esq., for the respondent.

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ARUNDELL

In these proceedings, which were consolidated for hearing and decision, the petitioners seek a redetermination of deficiencies for the year 1921 in the amount of $761.75 in the case of Sam F. Ziliox, and $5,042 in the case of Kathryn R. Ziliox. The issue common to both proceedings is whether dividends received by the petitioners from the Commercial Printing & Lithographing Co. in stock of another corporation constitute taxable income. Kathryn R. Ziliox alleges that if the dividend paid to her is taxable income, it is not taxable in 1921, because not received until 1922.

FINDINGS OF FACT.

During 1921 the petitioners, husband and wife, were stockholders of the Commercial Printing & Lithographing Co., an Ohio corporation, hereinafter called the Printing Co., of which Sam F. Ziliox was president, general manager, and a director.

At a special meeting held on October 28, 1921, the stockholders of the Printing Co. authorized its board of directors to sell its real property at a price not less than the amount at which it was then being carried on the corporate books. At a special meeting of the directors held subsequently on the same day, the president and secretary of the Printing Co. were authorized to obtain an offer for the property.

On December 10, 1921, the directors of the Printing Co. authorized the sale of the property to the Commercial Printing & Lithographing Building Co., hereinafter referred to as the Building Co., a newly organized Ohio corporation having an authorized capital stock of $200,000, divided into 2,000 shares, each of the par value of $100, for $1,000 in cash and 1,265 shares of the buyer's stock, with the condition that concurrently with the delivery of a deed for the property the buyer execute an instrument leasing the premises to the Printing Co. for a period of three years, with an option to renew for an additional period of two years. The directors also authorized the purchase, at a price not exceeding the par value of $1,000, of 10 shares of stock of the Building Co., so that there would be available for distribution to the stockholders of the Printing Co. 1,275 shares of the former's stock.

On December 21, 1921, the Printing Co. sold the property to the Building Co. for $127,500, the book value of the property, payable $1,000 in cash and the balance in stock of the buyer having an equal par value, and the latter leased the premises to the former pursuant to the terms of the resolution adopted on December 10, 1921. The deed conveying title to the property was delivered December 21, 1921.

Upon being advised by the president that the Printing Co. had a surplus in undivided profits of about $400,000, on December 21, 1921, the directors of the Printing Co. declared a "dividend of $127,500 payable in shares of the Capital stock of the Commercial Printing & Lithographing Building Company at par to stockholders of record on this date in proportion to their respective holdings of stock in this company." Pursuant to this action, Sam F. Ziliox and Kathryn R. Ziliox received 92 1/4 and 390 shares, respectively, of stock of the Building Co.

Sam F. Ziliox was present at all of the stockholders' and directors' meetings herein referred to. At the stockholders' meeting held on October 28, 1921, he held a proxy for the stock owned by his wife.

Article VI of the code of regulations of the Building Co. reads as follows:

Transfers of stock can only be made on the books of the Company in person or by attorney, on surrender of the previous certificate. If a certificate be lost or destroyed, a duplicate may be issued by order of the Board of Directors upon satisfactory proof of such loss or destruction, and the giving of a suitable bond of indemnity against loss by reason thereof.

Neither the Printing Co. nor the secretary of the Building Co. ever formally notified the stockholders of the Printing Co. of the declaration of the dividend, or that the stock was ready for delivery to them. Knowledge that the Printing Co. had declared a dividend and that the stock could be obtained by making application therefor at the office of the Building Co. was received by Kathryn R. Ziliox from her husband on some undisclosed date. Kathryn R. Ziliox could have received the stock any time after December 21, 1921, had she made application at the office of the Building Co.

Stock certificates of 390 shares of stock of the Building Co. bearing date of December 22, 1921, were delivered to Kathryn R. Ziliox at the office of the Building Co. on January 21, 1922.

Kathryn R. Ziliox reported her income on the cash receipts and disbursements basis.

In his determination of the deficiencies in controversy, the respondent included the par value of the stock in the income of the petitioners as taxable income subject to surtax.

OPINION.

ARUNDELL: The decision of whether the stock received by the petitioners constitutes taxable income, is, in our opinion, controlled by the rule announced in , followed in , and .

The Printing Co. acquired, through the sale of part of its assets, stock of the Building Co. This stock was accepted with the intention of distributing it pro rata among its stockholders. Promptly upon the consummation of the sale, the directors of the Printing Co. declared a dividend in an amount equal to the par value of the stock received, payable in such stock. The dividend was paid, and as a result, Sam F. Ziliox received 92 1/4 shares and his wife 390 shares of stock of the Building Co., the par value of which the respondent included in their income for 1921 as dividends subject to surtax.

In the Peabody case the Union Pacific Railroad Co. on March 2, 1914, paid on each share of its common stock a dividend of $3 in cash, and $12 and $22.50 in par value of common and preferred stock, respectively, of the Baltimore & Ohio Railroad, which stock it then owned. After referring to its prior decisions in , and , cases relied upon by the petitioners, particularly the former one, the court remarked:

It hardly is necessary to say that this case is not ruled by our decision in Towne v. Eisner, since the dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in specie of a portion of the assets of the Union Pacific, and is to be governed for all present purposes by the same rule applicable to the distribution of like value in money.

The petitioners here say that the transaction did not give them anything really different from what they had before. In other words, they say that before the sale their interest in the property sold was represented by stock of the Printing Co. and afterwards by stock of the Building Co. - a change in form of ownership that did not produce taxable income. In support of their position that the whole transaction was a matter of bookkeeping, and, therefore, merely a change in form, not substance, they cite, among other cases, , and . In the case of , a case in which the facts were essentially the same as in the instant case, the court, after stating that the issuance of stock received in exchange for property to stockholders as a dividend did not of itself enhance the wealth of such stockholders, said:

Nevertheless the new stock represented assets of the oil companies standing in the place of the pipe line properties that before had constituted portions of their surplus assets, and it was capable of division among stockholders as the pipe line properties were not. The distribution, whatever its effect upon the aggregate interests of the mass of stockholders, constituted in the case of each individual a gain in the form of actual exchangeable assets transferred to him from the oil company for his separate use in partial realization of his former indivisible and contingent interest in the corporation surplus. It was in substance and effect, not merely in form, a dividend of profits by the corporation, and individual income to the stockholder.

The petitioners next contend that the stock did not have a readily realizable market value in 1921, and, lacking such a value, the respondent is without authority to tax them on any part of the dividend until the stock is converted into cash or property having a readily realizable market value. Section 201 of the Revenue Act of 1921 defines the term "dividend" as "any distribution made by a corporation to its shareholders or members, whether in cash or other property * * *." The respondent has determined that the dividends in question were taxable under the Revenue Act to petitioners. The petitioners have offered no evidence that the stock in the Building Co. distributed to them had no readily realizable market value. They raise at best only a moot question with which we need not concern ourselves. The dividends in our opinion were properly subjected to the tax.

Kathryn R. Ziliox argues that, even though we should hold the dividend to be taxable, since she did not receive the stock until 1922, it is not income to her in 1921. A similar complaint is not being made by her husband.

Section 201(e) of the 1921 Act provides that "a taxable distribution made by a corporation to its shareholders or members shall be included in the gross income of the distributees as of the date when the cash or other property is unqualifiedly made subject to their demands."

The dividend was declared December 21, 1921, without any designation of a date for payment. No notification was given her by the Printing Co. or the secretary of the Building Co. that the dividend had been declared or that the stock was ready for delivery. The stock certificates were issued on December 22, 1921, on and after which date they could have been obtained by the petitioner upon application at the office of the issuing corporation. The stock was actually received on January 21, 1922.

In , reversing , dividends declared by several corporations in 1922, payable on or about December 31, 1922, were paid by checks dated December 30 and 31, 1922, on which dates they were mailed from the office of the corporations, but were not received by the taxpayer during the year 1922. The taxpayer was on the cash basis of reporting to a reserve for bad debts within the meaning of section 214(a)(7) the taxpayer had knowledge in 1922 that the dividends had been declared. In holding that the amount of the dividends was taxable in the year 1922, the court said:

The dividend was declared and payable in 1922. It follows, therefore, that the respondent immediately and before the expiration of the year 1922 became a creditor of the corporations. [Cases cited.] As a creditor, he had a right to demand his debt in money, for debts are payable in money. In other words, the cash was subject to his demand. The corporations were then liable.

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That it was not convenient and was perhaps physically impossible for him to appear at the offices of the various corporations before the year closed and demand the cash did not destroy his legal right to do so.

Following this decision, the respondent's action in holding the investments. They were not particularly concerned as to the time or times when the bank made additions to its reserves. That is, if the reserve in December, 1920, had equaled 25 per cent of the