Allen v. Comm'r of Corp.

• Decision Date: 20 September 1930
• Parties: ALLEN et al. v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

272 Mass. 502

172 N.E. 643

ALLEN et al.

v.COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Suffolk.

Sept. 20, 1930.

Appeal from Superior Court, Suffolk County; H. T. Lummus, Judge.

Complaint for abatement of income tax by Alice R. Allen and others, trustees under the will of Thomas Allen, against Henry F. Long, Commissioner of Corporations and Taxation. Judgment in favor of defendant, and plaintiffs appeal.

Reversed, and decree ordered to be entered granting abatement on footing stated in opinion.T. Allen, of Boston, for appellants.

R. A. Cutter, Asst. Atty. Gen., for appellee.

RUGG, C. J.

This is a complaint for the abatement of an income tax for the year 1928. The question relates to the method of assessment of a tax on income received from the sale of rights to subscribe for new stock in a New York corporation. These rights were received by the complainants by virtue of their ownership of shares of stock in that corporation. The complainants contend that the basis for the computation of the tax is the difference between the market value of the rights when received and the price for which they were sold. The defendant contends that the basis is the price for which the rights were sold without any deduction. The settlement of this controversy depends upon the correct interpretation of relevant provisions of the income tax law in the light of previous decisions. The governing sections of the income tax law are G. L. c. 62, § 5 as finally amended by St. 1928, c. 217, § 1, and G. L. c. 62, § 7 as finally amended by St. 1928, c. 217, § 2, the latter chapter by its section 3 having been made applicable to income received in 1928 and thereafter. Previous changes in these sections of the income tax law bear no indication of intent to alter their meaning and effect, as found in St. 1916, c. 269, so far as concerns present issues. They were made for brevity and clarity, and wrought no modification in the substance of the preexisting law. The quotations of the pertinent provisions of G. L. c. 62, §§ 5 and 7 as amended, now to be made, show by italics the words added by chapter 217. Section 5(c) as finally amended: ‘Income of the following classes received by any inhabitant of the commonwealth during the preceding calendar year shall be taxed as follows: * * * (c) The excess of the gains over the losses received by the taxpayer from purchases or sales of intangible personal property, whether or not said taxpayer is engaged in the business of dealing in such property, shall be taxed at the rate of three per cent. per annum. When shares of new stock of the company issuing the same received as a stock dividend or shares of stock which were the basis of such stock dividend are sold, the basis of determination of the gain or loss shall be the cost, or value when acquired otherwise than by purchase, of the stock which was the basis of such stock dividend, apportioned over the old and new shares of such company held aft-the receipt of such stock dividend. Any trustee or other fiduciary may charge any taxes paid under this paragraph against principal in any accounting which he makes as such trustee. If, in any exchange of shares upon the reorganization of one or more corporations or of one or more partnerships, associations or trusts, the beneficial interest in which is represented by transferable shares, the new shares received in exchange for the shares surrendered represent the same interest in the same assets, no gain or loss shall be deemed to accrue from the transaction until a sale or further exchange of such new shares is made.’ Section 7 as finally amended: ‘In determining gains or losses realized from sale of capital assets, the basis of determination, in case of property owned on January first, nineteen hundred and sixteen, shall be the value on that date, and in case of property acquired by purchase thereafter, the cost thereof. If the property other than stock dividends in new stock of the company issuing the same was acquired otherwise than by purchase, the basis of determination of the gain or loss shall be the value of the date when it was so acquired.’

The nature of the right to subscribe for new stock issued to shareholders on a specified date has been discussed in several of our decisions in connection with questions arising between life tenant and remainderman. It was said by Bigelow, C. J., in Atkins v. Albree, 12 Allen, 359, 361: ‘The right or privilege to take new shares in a corporation * * * is a benefit or interest which attaches to stock * * * as inherent in the shares in their very creation.’ It is an attribute appertaining to each share. It is treated as property capitalized by the corporation. It is a constituent part of each share. It partakes in some aspects of the features of capital. Hyde v. Holmes, 198 Mass. 287, 293, 84 N. E. 318. Whatever may be the nature of the right to subscribe for new shares, it is plain that such right does not come to the shareholder nor become a thing of value transferable and salable until actually declared and issued by the corporation. As gains from the sale of capital assets such rights when sold and realized in cash have the characteristics of income under article 44 of the Amendments to the Constitution and may be taxed as such. Gains derived from the sales of such rights are gains ‘received by the taxpayer from purchases or sales of intangible personal property’under section 5(c) of the income tax law. Tax Commissioner v. Putnam 227 Mass. 522 at page 534,116 N. E. 904, L. R. A. 1917F, 806. It was held in Parker v. Commissioner of Corporations and Taxation, 258 Mass. 379, 155 N. E. 177, that the effect of St. 1920, c. 352, now G. L. c. 62, § 1(b), was to exempt inhabitants of the Commonwealth from taxation as income on dividends paid in shares of stock in foreign corporations issuing the same, on the same footing as other dividends of such corporations were taxable as income under St. 1916, c. 269, § 2(b), and in place thereof to render taxable as income from that source only gain received from the sale of such stock declared as dividends as and when sold under St. 1916, c. 269, § 5(c), now G. L. c. 62, § 5(c). The vital question in that case was the correct method for calculating that gain. It was held that G. L. c. 62, § 7, furnished the rule to be followed, namely, the difference between the value of such stock in the market on the date when received by the shareholder and the cash price received for it when sold. That case applied to stock dividends in foreign corporations, when removed from taxation as income and thus taken out of the classifications with other dividends in foreign corporations for income tax purposes, the rule applicable to all gains from purchases or sales of intangible property acquired after the income tax law took effect, namely, the difference between its value when acquired and its sale price. The force and effect of the decision in the Parker Case was that dividends paid in shares of stock in foreign corporations issuing the same had been removed for income tax purposes from classification with other dividends on stock in foreign corporations, and placed in the same classification with other intangible personal property as to gains on sales. This latter classification includes rights to subscribe for new shares of stock in foreign corporations. In the year following the decision in the Parker Case there was enacted St. 1928, c. 217: manifestly the alteration made by its section 1 in G. L. c. 62, § 5(c), as previously amended was designed to provide a different statutory method for calculating the gains upon the sale of stock received as a stock...