California Electric Power Co. v. United States
| Decision Date | 16 March 1950 |
| Docket Number | No. 7888-BH.,7888-BH. |
| Court | U.S. District Court — Southern District of California |
| Parties | CALIFORNIA ELECTRIC POWER CO. v. UNITED STATES. |
Dempsey, Thayer, Deibert & Kumler, Los Angeles, Cal., for plaintiff.
Ernest A. Tolin, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, Eugene Harpole and James D. Pettus, Special Attorneys, Bureau of Internal Revenue, Los Angeles, Cal., for defendant.
This is an action to recover the sum of $4,549.51, alleged to have been erroneously exacted from the plaintiff, under Section 1802(a) of the Internal Revenue Code, Title 26 U.S.C.A., prior to the amendment of 1947, as a documentary stamp tax upon a certain issue of stock by plaintiff. The question for decision is whether the entire issue or only a part thereof of plaintiff's new preferred stock constituted an original issue within the meaning of Section 1802 (a). The facts were stipulated and are substantially as follows:
Prior to the time of the recapitalization in June of 1941, plaintiff's capital stock consisted of 105,023 preferred shares, each having a par value of $100, and 84,683 common shares, each having a value of $10. The stamp tax due on this stock had been paid. On June 20, 1941, the certificate of incorporation was amended to provide that each of the outstanding shares of old preferred stock were to be automatically converted into 4/5 share of $3 cumulative preferred stock of a par value of $50 each, and six shares of common stock of a par value of $10 each. This amendment was to be effective June 30, 1941. This change did not affect the proportionate interests of the shareholders in the corporation's assets. By itself this transaction would have been free of any stamp tax.
However, on June 30, 1941, the effective date of the amendment, the unpaid cumulative dividends on the old preferred stock were $11 per share. To settle the arrearages of dividends the Board of Directors had previously, by resolution, on May 29, 1941, authorized the making of an offer to the preferred shareholders of 1/5 share of $3 cumulative preferred stock and $1 in cash in full settlement of all arrearages on each share. The offer was to remain open until June 25, 1941, and was contingent on the amendment of the certificate of incorporation by the shareholders.
Pursuant to the plan for settlement of the dividend arrearages plaintiff issued new $3 stock on a one new for five old basis to the shareholders accepting the offer. Upon completion of the exchange, new capital sufficient to pay the dividend arrearages was transferred from surplus to the preferred stock account, so that the interest of the preferred stockholders accepting the offer was transmuted from a claim for dividends into additional shares of stock representing capitalized surplus.
Stated simply for the purposes of illustration, the two transactions may be compared as follows: If shareholder A had 50 shares of the original preferred stock, following the amendment he now has 40 shares of the new preferred stock. If he accepts the offer of stock for dividend arrearages he receives 10 additional shares of the new preferred stock and $50 in cash. At the same time there is a transfer from surplus to the capital stock account of an amount equal to the share value of the 10 additional shares.
If shareholder B had 50 shares of the original preferred stock, following the amendment he also now has 40 shares of the new preferred stock. If he does not accept the offer of the stock for the dividend arrearages he, of course, receives no additional shares and there is no transfer of any surplus to the preferred stock account. As to shareholder B, there has been no change except an exchange of old preferred shares for new preferred shares. His proportionate claim against the corporation's assets remains unchanged.
The plaintiff admits that the shares issued in satisfaction of the unpaid dividends were within the meaning of the term "original issue" and concedes the tax upon them.
The Commissioner conceded that no tax was due upon the new issue of the common stock but determined that the transfer of the surplus to the preferred stock account resulted in the dedication of additional capital; that this represented capital upon which no previous issue tax had ever been paid; and that the old capital and the new capital were so intermingled that it is impossible to determine which specific shares are represented by new capital added to the preferred stock account.
The tax was paid under protest and the claim for refund was denied.
The applicable statute at the time of the issue, Section 1802(a), imposed a stamp tax on the...
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