DocketNumber: Docket Nos. 98452, 98564-98568.
Citation Numbers: 42 B.T.A. 484, 1940 BTA LEXIS 998
Judges: Smith
Filed Date: 8/6/1940
Status: Precedential
Modified Date: 1/12/2023
*998 1. A stock dividend paid in nonvoting common stock to the holders of voting common stock and nonvoting common stock is a taxable dividend to the holders of voting common stock.
2. A stock dividend paid in nonvoting 7 percent preferred stock to the holders of voting common stock and to the holders of nonvoting common stock is a taxable dividend to both classes of stockholders.
*484 These proceedings, consolidated for hearing, involve income tax deficiencies for 1936 as follows:
Petitioner | Docket No. | Deficiency |
John M. Keister | 98452 | $510.92 |
Trust of John A. Sprouse, United States National Bank of Portland (Oregon), Trustee | 98564 | 1,394.00 |
R. A. Sprouse | 98565 | 16,562.37 |
J. A. Sprouse | 98566 | 1,329.97 |
Jennie G. Sprouse | 98567 | 75.95 |
Carrie S. Sprouse | 98568 | 2,197.87 |
The petitioners allege that the respondent erred in including in their gross income the value of certain shares of stock issued to them as stock dividends in*999 nonvoting common stock and in nonvoting 7 percent preferred stock of the Sprouse-Reitz Co. All of the facts have been stipulated.
FINDINGS OF FACT.
1. Each of the petitioners is a stockholder of Sprouse-Reitz Co., a corporation organized under the laws of the State of Oregon on *485 February 10, 1920. The petitioners, John M. Keister, J. A. Sprouse, and Carrie S. Sprouse, are residents of Portland, Oregon, and filed their returns for 1936 with the collector at Portland. The petitioners, R. A. Sprouse and Jennie G. Sprouse, are husband and wife and are residents of Oakland, California. They filed their returns for the year 1936 with the collector for the first district of California. No income tax return (Form 1040) was filed by or for the petitioner, Trust of John A. Sprouse, for the year 1936, although a fiduciary return of income (Form 1041) was filed for the petitioner for that year by the trustee, the United States National Bank of Portland, with the collector at Portland.
2. On February 13, 1936, the Sprouse-Reitz Co., hereinafter sometimes referred to as the company, had an authorized capital stock of $2,000,000 (par value) consisting of: (a) 6,000 shares*1000 of voting common stock of the par value of $100 per share; (b) 12,000 shares of nonvoting common stock of the par value of $100 per share; and (c) 2,000 shares of nonvoting 7 percent cumulative preferred stock of the par value of $100 per share, of which there was outstanding at that time voting common stock of the par value of $397,471.25, and nonvoting common stock of the par value of $819,333.06. None of the authorized preferred stock was outstanding at that time. The company's articles of incorporation contain the following provision:
The preferred stock shall be entitled to a dividend of 7 percent annually upon the par value before any dividends are paid on either class of the common stock. The common stock shall be entitled to dividends equally on each class thereof after the dividends on the preferred stock are paid.
The preferred stock and the nonvoting common stock shall have no voting power. The preferred stock shall be made redeemable at any time after three years from the date of its issue, in the discretion of the board of directors, but such redemption shall be at par, and after all accrued dividends have been paid. In the event of liquidation or dissolution*1001 of the corporation all classes of stock shall share equally in the assets.
3. On February 13, 1936, the company paid a 10 percent stock dividend on its voting and nonvoting common stock of $121,680.43 (par value) in nonvoting common stock, of which $40,333.34 was paid on its voting common stock and $81,347.09 on its nonvoting common stock.
4. On December 15, 1936, the company paid a 10 percent stock dividend on its voting and nonvoting common stock of $141,828.23 (par value) in nonvoting 7 percent preferred stock, of which $42,633.33 was paid on its voting common stock, and $99,194.90 on its nonvoting common stock.
5. All of the company's stockholders, whether they held voting or nonvoting common stock, participated in the dividend distributions of February 13 and December 15, 1936, in proportion to their respective stockholdings. The fair market value of the company's nonvoting *486 common stock at the time of the distribution thereof to its stockholders as a stock dividend on February 13, 1936, was $100 per share. The fair market value of the company's nonvoting 7 percent preferred stock at the time of the distribution thereof to its stockholders as a stock dividend*1002 on December 15, 1936, was $100 per share.
6. The following tabulation shows (a) the amount (par value) of the company's nonvoting common stock received by the petitioners on February 13, 1936, as a dividend on their nonvoting common stock; (b) the amount (par value) of the company's nonvoting common stock received by the petitioners on February 13, 1936, as a dividend on their voting common stock; (c) the amount (par value) of the company's 7 percent preferred stock received by the petitioners on December 15, 1936, as a dividend on their voting common stock; (d) the amount (par value) of the company's 7 percent preferred stock received by the petitioners on December 15, 1936, as a dividend on their nonvoting common stock; and (e) the amounts by which the respondent has increased the net incomes as reported by the respective petitioners for the year 1936:
(a) | (b) | (c) | (d) | (e) | |
Name | Nonvoting com. stock (par value) recd. on 2/13/36, as dividend on nonvoting com. stock | Nonvoting com. stock (par value) recd. on 2/13/36, as dividend on voting com. stock | Nonvoting 7% pfd. stock (par value) recd. on 12/15/36, as dividend on voting com. stock | Nonvoting 7% pfd. stock (par value) recd. on 12/15/36, as dividend on nonvoting com. stock | Amounts by which petitioners' reported income for 1936 has been increased by respondent |
Trust of John A. Sprouse, decd | $8,000.00 | $8,000.00 | $800.00 | $16,800.00 | |
J. A. Sprouse | $414.73 | 4,508.72 | 4,508.72 | 907.07 | 9,924.51 |
Carrie S. Sprouse | 1,909.99 | 3,193.46 | 3,779.67 | 2,420.33 | 9,979.67 |
R. A. Sprouse | 20,000.00 | 22,300.00 | 42,300.00 | ||
Jennie G. Sprouse | 83.45 | 317.90 | 317.90 | 123.59 | 759.39 |
John M. Keister | 2,028.88 | 1,721.12 | 1,721.12 | 2,028.88 | 5,471.12 |
*1003 7. In none of the returns filed by or for any of the petitioners for the year 1936 was there reported any amount on account of the stock dividends received by them during that year as above set forth. In his determination of the deficiencies involved the respondent increased the net incomes as reported by the petitioners for the year 1936 by the respective amounts, as shown in column (e) of paragraph 6, above, on the ground that the stock dividends in question, both nonvoting common and preferred, constituted taxable income under the Six-teenth Amendment to the Constitution and within the meaning of section 115(f) of the Revenue Act of 1936. It was further held by the respondent that the stock dividends represented taxable income to the extent of their fair market value, which was determined by him to be equal to their par value. No part of the amounts appearing in column (a) of paragraph 6, above, has been included by *487 the respondent in the taxable incomes of the respective petitioners as determined by him.
8. The amount of $9,979.67, appearing in column (e) of paragraph 6, above, as representing the amount by which respondent increased the net income as reported*1004 by Carrie S. Sprouse for the year 1936, included the sum of $3,779.67 as the amount of the nonvoting common stock (par value) received by her on February 13, 1936, as a dividend on voting common stock, instead of the amount of $3,193.46 shown in column (b) of paragraph 6, above.
OPINION.
SMITH: The questions for our determination in these proceedings are whether the distributions which the Sprouse-Reitz Co. made in 1936 of its nonvoting common stock to holders of voting common stock, and of its nonvoting 7 percent preferred stock to holders of its voting common stock and its nonvoting common stock were taxable dividends within the meaning of section 115(f) of the Revenue Act of 1936.
Section 115 of the Revenue Act of 1936 provides in part:
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title (except in section 203(a)(3) and section 207(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year*1005 (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
* * *
(f) STOCK DIVIDENDS. -
(1) GENERAL RULE. - A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the
In
Although
* * * Under our decisions the payment of a dividend of new common shares, conferring no different rights or interests than did the old, the new certificates, plus the old, representing the same proportionate interest in the net assets of the corporation*1007 as did the old, does not constitute the receipt of income by the stockholder. On the other hand, where a stock dividend gives the stockholder an interest different from that which his former stock holdings represented he receives income. The latter type of dividend is taxable as income under the
At the time the corporation here made the dividend distribution of its nonvoting common stock on February 13, 1936, there was outstanding only two classes of stock, voting common shares and nonvoting common shares. The holders of both classes of stock shared alike in the distribution. The Commissioner treated the distribution as a taxable dividend to the voting common stockholders but not to the nonvoting common stockholders.
The respondent makes the argument that the voting shares and the nonvoting shares represented different property rights and that the holders of the nonvoting shares might have transferred them without in any way disturbing the voting control, citing
* * * But entirely apart from this, the undeniable difference in the situation of the stockholders is that their interest, after the dividend, became to some extent transferable in parts where before it could be disposed of only as a whole. Before the dividend, it is true, a stockholder could have sold a portion of his common shares. But, as pointed out in the
The portion of the Court's opinion in
It is said that a stockholder may sell the new shares acquired in the stock dividend; and so he may, if he can find a buyer. It is equally true that if he does sell, and in doing so realizes a profit, such profit, like any other, is income, and so far as it may have arisen since the
In
We think that under the opinion of the Supreme Court in the
The dividend of the 7 percent nonvoting preferred stock on the voting and nonvoting common stock, which was distributed December 15, 1936, presents a situation even more favorable to the respondent. This stock was entitled to 7 percent annual dividends before any dividends could be paid on the common voting or nonvoting shares. It was redeemable at par after three years from the date of issue in the discretion*1013 of the directors and after payment of all accrued dividends. These features gave it an entirely different character from the voting and nonvoting common shares. It clearly represented a different interest in the corporation. It is true, as petitioners point out, that the preferred shares were not to be favored in case of liquidation or dissolution and it is to be noted further that their issuance did not in any way affect the voting control of the corporation, but nevertheless, under the authoritative cases, they represented a new and different interest in the corporation and therefore constituted taxable income.
Reviewed by the Board.
1. Proceedings of the following petitioners are consolidated herewith: Trust of John A. Sprouse, United States National Bank of Portland (Oregon) Trustee; R. A. Sprouse; J. A. Sprouse; Jennie G. Sprouse; and Carrie S. Sprouse. ↩