Palmer v. Commissioner of Internal Revenue Helvering v. Palmer

• Decision Date: 08 November 1937
• Docket Number: 59,Nos. 19,s. 19
• Parties: PALMER v. COMMISSIONER OF INTERNAL REVENUE. HELVERING, Commissioner of Internal Revenue, v. PALMER
• Court: U.S. Supreme Court

302 U.S. 63

58 S.Ct. 67

82 L.Ed. 50

PALMER

v COMMISSIONER OF INTERNAL REVENUE.

HELVERING, Commissioner of Internal Revenue,

v. PALMER.

Nos. 19, 59.

Argued Oct. 19, 1937.

Decided Nov. 8, 1937.

Messrs. Robert G. Dodge and Harold S. Davis, both of Boston, Mass., for Palmer.

Messrs. Homer S. Cummings, Atty. Gen., and James W. Morris, Asst. Atty. Gen., for Helvering.

Mr. Justice STONE delivered the opinion of the Court.

The question for decision is whether a purported sale by a corporation to its stockholders, of shares of stock issued by and acquired from another corporation, the sale being effected by means of an issue to the stockholders of rights to purchase the stock at a named price, is to be treated as a distribution of corporate earnings taxable as a dividend to the stockholders when received, within the reach of sections 22 and 115 of the Revenue Act of 1928, c. 852, 45 Stat. 791 (26 U.S.C.A. §§ 22, 115 and notes).

In January, 1929, the American Superpower Company, of which petitioner was a stockholder, acquired through consolidation of public utility corporations, in one of which it in turn was a stockholder, a large amount of the securities of the United Corporation, the latter being received in exchange for stock of the consolidated corporations owned by Superpower. The securities received included shares of the preference stock of United, 2,210,583 shares of its common stock, and 1,000,000 rights to subscribe for United common stock at any time for $27.50 a share. United was incorporated January 7, 1929. The consolidation was effected January 12th, when Superpower became entitled to its allotment of the securities. On January 23, 1929, the board of directors of Superpower, pursuant to a plan to strengthen its cash position and to create a wide market for the stock of United, adopted a resolution offering to its common stockholders of record January 26, 1929, the privilege of purchasing, at $25 a share, one-half share of United for each share of their common stock in Superpower. The privilege was evidenced by negotiable certificates distributed to stockholders about January 31. By their terms they were to become void unless the privilege was exercised by February 15, 1929. On that date petitioner exercised the privilege by purchasing his allotment of 3,198 shares of United at $25 a share. In its books, records and accounts, Superpower treated the transaction as a sale of the United stock, resulting in no change in its net assets or earnings.

The prices received by Superpower for shares distributed to its stockholders represented a substantial profit to it over cost of the securities which it had exchanged for them. It reported the profit in its 1929 income tax return and paid the tax on it for that year. In computing the tax the commissioner in allocating the cost of the three classes of securities received from United by Superpower, found it necessary to determine the value of each class of security when received. He did this by finding the total value of the securities and allocating to the common stock a value of $25 a share. On or about January 9th, bankers who were active in promoting the consolidation purchased from United 400,000 shares of its stock at $22.50 per share. Shortly after the adoption by Superpower, on January 23rd, of the plan for distribution of the United stock, an active market developed on the New York Curb Exchange for the sale of subscription rights. On January 25th, 11,000 rights were sold at prices ranging from 11 5/8 to 12 3/8 making the cost per share to purchasers of the rights, upon their exercise, about $50. On January 28th, 44,000 of them were dealt in on the exchange at prices ranging from 12 5/8 to 17 1/2, with a corresponding cost of the shares of from $50 to $60. On January 29th, 30th and 31st, Superpower sold about 9,200 shares of its United Stock on the open market at from $50 to $63 per share.

On May 1, 1929, a like privilege to purchase one-fourth of a share of stock of United At $30 a share for each share of Superpower was extended to the stockholders of the latter, as of May 8, 1929, which petitioner similarly exercised on May 24, 1929. On June 5, 1929, a like privilege was given to the common stockholders of Superpower as of June 18, 1929, to purchase stock of Commonwealth and Southern Corporation at $15 a share, which petitioner exercised on July 2, 1929.

Petitioner did not, in 1929, sell or otherwise dispose of any of the shares for which he subscribed or report their receipt in his income tax returns for that year. The Com- missioner ruled that the rights to subscribe were dividends and assessed a deficiency against petitioner based on their market value on the respective dates when the stockholders were first entitled to exercise them. The cause was heard by the Board of Tax Appeals upon a stipulation of facts which it adopted as a finding and which specified the facts already detailed. The Board held that the distributions were sales of the shares by Superpower to its stockholders, not dividends, and reduced the deficiency accordingly. In reaching this decision the Board, upon consideration of all the facts and circumstances attending the issue of the rights by Superpower to its stockholders, found that there was no intention to distribute any of its earnings to stockholders and that the transaction was what it purported to be on its face—a sale to stockholders of part of the corporate assets. As a supporting fact it found that the fair value of the common stock of United during January, 1929, was $25 a share. It concluded that the facts as stipulated and as found by it did not show fair market value of the United Stock in May, 1929, or of the Commonwealth and Southern stock in June or July of that year. Upon the entire record it was of the opinion that there was no reason to treat the transaction any differently than the parties had treated it, as a sale of a part of the assets of Superpower from which no taxable gain would result before the taxpayer sold or otherwise disposed of the shares.

The Court of Appeals for the First Circuit reversed, holding that the distributions were taxable dividends measured by the difference between the value of the several allotments of shares on the respective dates when the rights were exercised and the prices paid for them. 88 F.(2d) 559. In reaching this conclusion the court recognized that the Board had found the January, 1929, value of the stock of United to be $25 a share. But it thought that the Board in making the finding had disre garded the substantial prices at which the rights were sold pending their exercise, denying to them persuasive weight because it had mistakenly assumed that the purported sale could not be treated as a dividend unless there was intention to distribute the corporate earnings. The court held that what was done, and not what was intended, was the decisive factor, and as there was substantial evidence that the stock, when distributed, was worth more than the price received, there was a distribution of corporate assets from earnings, taxable to stockholders as a dividend. It accordingly remanded the cause to enable the board to ascertain the value of the distributed shares on the dates when the rights were exercised (February 15, 1929, May 24, 1929, July 2, 1929).

Both the taxpayer and the Commissioner petitioned for certiorari, the one challenging the ruling that the distributions were dividends, and the other assigning as error the failure to hold that the critical dates for fixing the value of the dividends for taxation were either those when the rights were received by the stockholders or when the stockholders first became entitled to exercise them, rather than the times when they were actually exercised. We granted certiorari, 301 U.S. 676, 57 S.Ct. 922, 81 L.Ed. 1336, because of the importance of the questions in the administration of the revenue laws, and the doubts which have been raised as to their appropriate answers by the varying opinions of the circuit courts of appeals. Compare the opinions below, Ramapo, Inc., v. Commissioner (C.C.A.2d) 84 F.(2d) 986, and Commissioner v. Mayer (C.C.A.7th) 86 F.(2d) 593, with Helvering v. Bartlett (C.C.A.4th) 71 F.(2d) 598, and Commissioner v. Cummings (C.C.A.5th) 77 F.(2d) 670.

By sections 111, 112 and 113 of the Revenue Act of 1928 (26 U.S.C.A. §§ 111, 112 and notes, 113 note), profits derived from the purchase of property, as distinguished from exchanges of...