COMMISSIONER OF INTERNAL REVENUE v. Brown, 4920
| Decision Date | 22 March 1934 |
| Docket Number | No. 4920,4921.,4920 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. BROWN (two cases). |
| Court | U.S. Court of Appeals — Seventh Circuit |
Sewall Key and Carlton Fox, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Chester A. Gwinn, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.
Herbert Pope, E. Barrett Prettyman, and Benjamin M. Price, all of Washington, D. C., for respondents.
Before ALSCHULER, SPARKS, and FITZHENRY, Circuit Judges.
These cases are brought here by the Commissioner to reverse a holding of the Board of Tax Appeals that the redemption and cancellation of the preferred stock in question did not take place "at such time and in such manner" as to make it essentially equivalent to the distribution of a taxable dividend within the meaning of section 201 (g) of the Revenue Act of 1926, 26 USCA § 932 (g).
In 1922 there was a recapitalization of the Squire Dingee Company, the stock of which was owned by Frank B. Brown and Harry A. Brown, whereby the capital was increased from $100,000 to $1,500,000, and the stockholders exchanged their old stock, aggregating 1,000 shares of common, for 10,000 shares of new common and 5,000 shares of preferred stock. At the same time the purposes of the corporation were considerably enlarged by an amendment to its charter, and the number of directors increased from four to five. The directors' resolution of December 15, 1922, directed the officers, in case the stockholders should authorize the increase of the capital stock, "to issue stock of the company in exchange for existing stock." It also directed the exchange of the new stock "upon the surrender" of the old, and that is what happened. On May 21, 1925, the entire issue of preferred stock was redeemed at $37.32½ per share.
The Squire Dingee Company is an Illinois corporation, of which, prior to March 1, 1913, and up to and including the tax year involved, 1925, Frank B. Brown and Harry A. Brown, his brother, were the sole stockholders. The former owned 51 per cent. and the latter 49 per cent. of the stock. After the death of Frank B. Brown, respondent Pearl B. Brown was appointed executrix of his last will and testament.
Upon re-examination of the respective returns for the year 1925, the Commissioner determined deficiencies in income taxes against Pearl B. Brown, executrix, in the sum of $15,976.18, and against Harry A. Brown, in the sum of $13,405.73. Both taxpayers appealed to the United States Board of Tax Appeals. The Board filed its findings of fact and opinion, deciding and holding there was no deficiency as to either of the taxpayers for the year 1925.
The entire amount received by the taxpayers for their preferred stock in 1925 was $95,178.76 by Frank B. Brown, and $91,446.25 by Harry A. Brown.
The Board held that the issuing of the new stock in 1922 was a stock dividend, but that the redemption of the preferred stock in 1925 was not carried out "at such time and in such manner" as to make the transaction essentially equivalent to the distribution of a dividend.
The Commissioner contends that the Board properly found that the issuing of the preferred stock in 1922 was a stock dividend, but erred in finding that the redemption was not made at such time and in such manner as to make the transaction essentially equivalent to a distribution of a dividend.
It was contended by the taxpayers before the Board that the redemption of the preferred stock was not effected at such time and in such manner as to be essentially equivalent to a taxable dividend; also, that section 201 (g) did not apply for the additional reason that the stock redeemed in 1925 had not been distributed as a stock dividend, and that section and paragraph excluded from its operation a redemption made before January 1, 1926, of stock which had not been issued as a stock dividend.
There is a grave question as to whether the redemption of the preferred stock in this case is not excluded from the operation of section 201 (d) of the Revenue Act of 1921 (42 Stat. 228), in force at the time it was issued, or section 201 (g) of the Act of 1926, 26 USCA § 932 (g), in the light of section 202 (c) (1) and (2) of the Revenue Act of 1921 (42 Stat. 230). However, in the view we take of the effect of the redemption of the preferred stock, it is unnecessary to pass upon this question.
Assuming, but not holding, that the exchange of old common for new common and preferred stock, in 1922, amounted to a stock dividend, was the redemption and cancellation of the preferred stock in the latter part of May, 1925, over two years and five months after it was issued, effected "at such time and in such manner" as to make the distribution and cancellation or redemption "essentially equivalent to a taxable dividend," under section 201 (g) of the Revenue Act of 1926 (USCA title 26 § 932 (g)?
Paragraph (h), section 201, supra (26 USCA § 932 (h), provides: "(h) As used in this section the term `amounts distributed in partial liquidation' means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock."
In the present case there was a distribution in complete cancellation or redemption of a part of the stock of the corporation, that is, all of the preferred stock.
Under subdivision (c) 26 USCA § 932 (c) partial as well as complete liquidation distributions are to be treated as payments in exchange for the liquidated stock, and then the question arises of a taxable profit or a deductible loss.
Subdivision (g) makes an exception, but does not turn every partial liquidation into a dividend whenever there are undistributed earnings in the corporation. On the contrary, in such a case the partial liquidation is to be treated as the equivalent of a dividend only when made under certain specified circumstances. It is the time and manner of the liquidation, not the existence of undistributed earnings, which makes the distinction essentially...
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