GENERAL UTILITIES & OPERATING COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 30 January 1934 |
| Docket Number | Docket No. 52770. |
| Citation | 29 BTA 934 |
| Parties | GENERAL UTILITIES & OPERATING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
R. Kemp Slaughter, Esq., Hugh C. Bickford, Esq., and Joseph A. Slattery, Esq., for the petitioner.
William E. Davis, Esq., and Paul E. Waring, Esq., for the respondent.
The respondent has determined a deficiency in income tax in the amount of $128,342.07 for the calendar year 1928. The only question presented in this proceeding for redetermination is whether petitioner realized taxable gain in declaring a dividend and paying it in the stock of another company at an agreed value per share, which value was in excess of the cost of the stock to petitioner.
FINDINGS OF FACT.
1. The petitioner is a Delaware corporation, with its principal offices at Baltimore, Maryland. It is engaged in the business of owning securities of, managing, and operating public utility properties.
2. On January 1, 1927, the petitioner acquired 20,000 shares of no par value of the common capital stock of another corporation, the Islands Edison Co. Said 20,000 shares of stock constituted one half of the total common capital stock of the Islands Edison Co. outstanding; the remaining 20,000 shares were owned by Gillet & Co., which company is not connected with petitioner nor with petitioner's stockholders. Petitioner acquired the 20,000 shares of common capital stock of the Islands Edison Co. at a cost to it of $2,000 and set up such stock on its books at a total value of $2,000.
3. During the month of January 1928 Walter Whetstone, president of the Southern Cities Utilities Co., became interested in acquiring control of a Santo Domingo company, the stock of which was owned by the Islands Edison Co. Upon inquiring of Gillet & Co. he ascertained that the entire common stock outstanding of the Islands Edison Co. was owned equally, as aforesaid, by Gillet & Co. and petitioner. During a conference with J. C. M. Lucas, president of petitioner, Whetstone discussed the purchase of the Santo Domingo company or the Islands Edison Co. common stock and as a result thereof was given permission to make an investigation of the properties of the Santo Domingo company. Sometime in February of 1928 Whetstone informed Gillet and Lucas that his plans required the delivery of all the common stock of the Islands Edison Co., that he was informed by Gillet that his firm was ready and willing to make the sale of the 20,000 shares owned by Gillet & Co. of the Islands Edison Co. common stock, and that he (Gillet) and Lucas, president of petitioner, had agreed upon the price at which the sale would be made. Whetstone was informed by Lucas that if a sale of the 20,000 shares of the common stock of the Islands Edison Co. then owned by the petitioner were consummated, such a sale would be made only after petitioner had distributed the Islands Edison Co. shares to its stockholders; because they had been advised by their attorneys that if sale were made by petitioner it would be subject to a tax on any profit realized on the sale and that when the proceeds of the sale were distributed to the stockholders, the stockholders would have to pay another tax thereon. The price to be paid for the properties and the terms and conditions of the sale generally were agreed upon by Gillet, Lucas, and Whetstone, but no contract was entered into by them, it being understood and agreed between them that petitioner would make distribution of the stock of the Islands Edison Co. to its stockholders and that counsel would prepare a written agreement embodying the terms and conditions of the sale, the agreement to be submitted for approval to the stockholders of the Islands Edison Co. after the distribution of said stock by the petitioner. Lucas never held power of attorney to sell the stock for the petitioner or its stockholders.
4. At a meeting of petitioner's directors on March 22, 1928, the matter of petitioner's stockholdings in the Islands Edison Co. was discussed and it was reported as the opinion of petitioner's officers that the stock was worth at least $1,122,500 and that it should be appreciated on petitioner's books to that figure. Further matters discussed and action taken at that meeting are recorded in the minutes as follows:
The Chairman also suggested to the meeting that the Company considered declaring a dividend on the Common Stock of the Company in the amount of $1,071,426.25, payable out of the appreciation so set up, the dividends to be paid in Common Stock of the Islands Edison Company at a value of $56.12½ a share.
Whereupon the following resolutions were unanimously passed, viz:
There being no further business before the meeting, it then adjourned.
5. The petitioner thereupon, on March 22, 1928, simultaneously entered on its books of account, in compliance with the foregoing resolution, the following entries, with full explanation following each entry, only part of which is here set forth:
1928 Dr. Cr
March 22. Investments ___________________________ $1,120,500.00
Surplus arising from appreciation of
assets _______________________________ $1,120,500.00
March 22. Surplus arising from appreciation of
assets ________________________________ 1,071,426.25
Dividends payable _____________________ 1,071,426.25
To record dividend declared on the
Common Stock of the Company, payable
in Common Stock of The Islands
Edison Company at a valuation of
$56.12½ a share, * * *
March 22. Dividends payable _______________________ 1,071,426.25
Investments ______________________________ 1,071,426.25
To record payment of dividends declared
March 22, 1928, on the common
Stock of this Company, such
payment being made by delivery of
19,090 shares of the Common Stock
of The Islands Edison Company at a
valuation of $56.12½ per share
6. Thereupon, on March 22, 1928, in accordance with the resolution of the directors the petitioner distributed to its own stockholders, 19,090 shares of the stock of the Islands Edison Co., such shares representing two shares of the Islands Edison Co. stock theretofore owned by petitioner for each one share of the 9,545 shares of petitioner's own capital stock then outstanding. On the same date, March 22, 1928, the shares of stock were transferred on the stock records of the Islands Edison Co. to the individuals receiving the distribution. After transfer of the 19,090 shares, there remained in the hands of petitioner 910 shares of stock of the Islands Edison Co., which 910 shares were retained by it and a new certificate for such shares was issued to it on March 22, 1928.
7. On March 26, 1928, the stockholders of the Islands Edison Co. (one of which was the petitioner, owning 910 shares) and the Southern Cities Utilities Co., entered into a written contract of sale of the Islands Edison Co. stock. At no time did petitioner agree with Whetstone or the Southern Cities Utilities Co., verbally or in writing, to make sale to him or to the Southern Cities Utilities Co. of any of said stock except the 910 shares of the Islands Edison Co.
8. The fair market value of the Islands Edison Co. stock as of March 22, 1928, was $56.12½ per share, said amount being computed in the contract dated March 26,...
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