Commissioner of Internal Revenue v. Mayer, 5755.

• Citation: 86 F.2d 593
• Decision Date: 30 November 1936
• Docket Number: No. 5755.,5755.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. MAYER.
• Court: U.S. Court of Appeals — Seventh Circuit

86 F.2d 593 (1936)

COMMISSIONER OF INTERNAL REVENUE v. MAYER.

No. 5755.

Circuit Court of Appeals, Seventh Circuit.

November 30, 1936.

Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and Ellis N. Slack, Sp. Assts. to the Atty. Gen., for petitioner.

L. A. Luce, of Washington, D. C., for respondent.

Before EVANS, Circuit Judge, and LINDLEY and BRIGGLE, District Judges.

EVANS, Circuit Judge.

The Internal Revenue Commissioner determined that respondent was liable for a deficiency income tax for the year 1929 based upon the fair market value of rights (warrants) issued to him in 1929 as a stockholder of corporation A. The warrants gave him the right to subscribe for stock in corporations B and C, which stock was owned by A, at prices below the existing market price. Respondent exercised his rights in 1929. The stock thus acquired by him in 1929 was not sold in that year. Was the difference between market and warrant price of stock taxable as income to respondent in 1929?

The Commissioner ruled against respondent. The Board of Tax Appeals set aside the Commissioner's determination and held that no taxable income was received by the taxpayer in 1929 and none could be determined until the stock acquired by virtue of the warrants was sold, at which time profits or losses would be ascertained.

After the Board decided respondent's case, the Circuit Court of Appeals of the Second Circuit, in a case involving very similar facts (Ramapo, Inc. v. Commissioner, 84 F.(2d) 986), held that to the extent that the value of the stock for which rights were issued exceeded the price payable therefor, they were dividends within the meaning of the Revenue Act of 1928.

We agree with this conclusion.

Section 115 of the Revenue Act of 1928 (26 U.S.C.A. § 115 and note) defined dividends as follows:

"(a) Definition of dividend. The term `dividend' when used in this title chapter (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913."

We assume that for purposes of taxation the meaning of the word "dividend" may differ from that which is ordinarily given to the term by courts. Equally clear is it that a common stock dividend in the same company to common stockholders, is not taxable. Towne v. Eisner, 245 U.S. 418, 38 S.Ct. 158, 62 L.Ed. 372, L.R.A.1918D, 254; Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570. Equally well settled are the rulings to the effect that a dividend of stock of another company may be the subject of an income tax. Peabody v. Eisner, 247 U.S. 347, 38 S. Ct. 546, 62 L.Ed. 1152; U. S. v. Phellis, 257 U.S. 156, 42 S.Ct. 63, 66 L.Ed. 180; Rockefeller v. U. S., 257 U.S. 176, 42 S. Ct. 68, 66 L.Ed. 186. Also it is settled that the grant of a right to purchase stock is essentially analogous to a dividend of stock.

From the foregoing it follows that when the right to purchase stock is...