Commissioner of Internal Revenue v. Tillotson Mfg. Co., 6564.
| Decision Date | 14 March 1935 |
| Docket Number | No. 6564.,6564. |
| Citation | 76 F.2d 189 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. TILLOTSON MFG. CO. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Berryman Green, of Washington, D. C. (Sewall Key and Norman D. Keller, both of Washington, D. C., on the brief), for petitioner.
Lehr Fess, of Toledo, Ohio (Doyle & Lewis and Frank S. Lewis, all of Toledo, Ohio, on the brief), for respondent.
Before MOORMAN, HICKS, and ALLEN, Circuit Judges.
The Commissioner determined a deficiency of $16,187.20 in respondent's income tax for 1926. The Board of Tax Appeals decided that the Commissioner erred in his determination. 27 B. T. A. 913. The controversy arises out of the distribution of common stock of the Willys-Overland Company to respondent, a preferred stockholder of that corporation.
On December 2, 1925, the directors of the Willys-Overland Company declared a dividend of $29.75 on each share of outstanding preferred stock, being dividends in arrears from October 1, 1921, to October 1, 1925, inclusive, payable on January 2, 1926, in common stock of the company, to be taken at $25 per share, and a cash dividend, not material here. For this purpose they appropriated 262,389 shares of the unissued capital stock of the company. On January 2, 1926, respondent received 7,735 shares of no-par common stock, the market value of which upon that date was $31.375 a share, aggregating $242,685.63. The market value of the preferred stock on this date was $93, or $604,500 for respondent's 6,500 shares. On February 8, 1926, respondent sold its entire holdings of preferred stock for $599,906.67.
In respondent's income tax return for 1926, it treated the receipt of the common stock as a property dividend and included its value ($242,685.63) with other dividends in its gross income and in its deductions, under section 234 (a) (6) of the Revenue Act of 1926, 26 USCA § 986 (a) (6). It reported a profit of $181,331.67 from the sale of the preferred shares, based upon their original cost of $418,575. The Commissioner treated the transaction as a stock dividend, tax free under section 201 (f) of the Revenue Act of 1926, 26 USCA § 932 (f), applied it to reduce the cost of the preferred stock, apportioning the original cost of $418,575 between the old preferred and the new common in the ratio that the total market value on January 2, 1926, of each bore to the combined total market value of both. Article 1599, Regulations 69, promulgated under the Revenue Act of 1926. This resulted in an assigned cost of $298,669.81 to the preferred shares from which the Commissioner computed a profit of $301,236.86 upon the sale of the preferred stock. He thus determined the deficiency.
The sole question involved is whether a dividend declared upon cumulative non-voting preferred shares payable in common voting shares is a stock dividend tax free within the purview of section 201 (f). If the dividend was not subject to tax, the Commissioner's determination was correct. If the dividend was subject to tax, the respondent correctly measured its profit from the sale of the preferred stock.
The Commissioner urges that under the decisions of the Supreme Court of the United States, and particularly Eisner, Collector, v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, this particular distribution of common stock is not subject to tax, and that the Board of Tax Appeals erred in its order and decision. In that case, common stock was distributed pro rata to common stockholders. The decision that the dividend was not subject to tax was based partly upon the proposition that there was no severance of the corporate assets, and hence no income received by the distributee. However, it was also pointed out in that case, as a material fact, that the dividend did not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders as they stood before.
Two tests were thus established for distinguishing a taxable from a non-taxable dividend in stock: (1) Severance of assets from the corporation, and (2) alteration of the preexisting proportionate interest of the stockholders.
In the instant case the first test was met. There was no severance of corporate assets. The distribution was made to its preferred shareholders by the corporation, not in stock of another corporation, not from its own treasury stock, but from its own unissued stock.
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Helvering v. Gowran
...The Commissioner secured a reconsideration of the case. He then contended that, under the rule declared in Commissioner of Internal Revenue v. Tillotson Mfg. Co. (C.C.A.) 76 F.2d 189, the stock dividend was taxable, because it had resulted in a change of Gowran's proportionate interest in t......
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Strassburger v. Commissioner of Internal Revenue, 48.
...from those which he previously owned, and as such, therefore, constitutes income which could be taxed." See also Commissioner v. Tillotson Mfg. Co., 6 Cir., 76 F.2d 189; Kelly Trust v. Commissioner, 38 B.T.A. 1014, which was affirmed in an opinion (1939 C.C.H., Vol. 4, Par. 9624) later with......