General Securities Co. v. Commissioner of Internal Rev., 2271.

• Decision Date: 29 October 1941
• Docket Number: No. 2271.,2271.
• Citation: 123 F.2d 192
• Parties: GENERAL SECURITIES CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

123 F.2d 192 (1941)

GENERAL SECURITIES CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2271.

Circuit Court of Appeals, Tenth Circuit.

October 29, 1941.

Stephen H. Hart, of Denver, Colo. (James B. Grant and Lewis & Grant, all of Denver, Colo., on the brief), for petitioner.

Harry Marselli, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., J. Louis Monarch and Warren F. Wattles Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before PHILLIPS, BRATTON, and HUXMAN, Circuit Judges.

PHILLIPS, Circuit Judge.

This is a petition by the General Securities Company¹ to review a decision of the Board of Tax Appeals.

The taxpayer is a corporation organized under the laws of the state of Colorado and is a personal holding company within the meaning of § 351(b) (1) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 757. During the calendar year 1934 the taxpayer's undistributed adjusted net income under § 351 of the Revenue Act of 1934, before the deduction for dividends paid, was $229,017.02. During the year 1934 the taxpayer paid cash dividends out of earnings and profits accumulated after February 28, 1913, aggregating $134,850. In addition thereto, on November 24, 1934, it declared a property dividend out of earnings and profits accumulated after February 28, 1913. The property dividend consisted of 1,971 shares of the preferred stock and 8,283 shares of the common stock of the Denver Tramway Corporation. These shares had been acquired, together with other assets, in 1921 by the issuance of the taxpayer's capital stock. Their adjusted basis to the taxpayer as determined by the Revenue Act of 1934 amounted to $103,898.17. Their appraised market value at the date of acquisition was $110,654.64. Upon a declaration and payment of such dividend in property the taxpayer reduced its surplus on its books in the amount of $110,654.64. The market value of the shares at the time of distribution was $1,068.33. The taxpayer deducted $110,654.64 on account of this dividend in property. The Commissioner allowed a deduction on account of such dividend in property in the sum of $1,068.33. The Board of Tax Appeals affirmed the action of the Commissioner.

The sole issue presented is the proper amount of the deduction on account of the dividend in property so distributed.

Section 351 of the Revenue Act of 1934 imposes upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of 30 per cent of the amount thereof not in excess of $100,000 and 40 per cent of the amount in excess of $100,000.

Section 351 further provides that the term "undistributed adjusted net income" means the adjusted net income minus dividends paid during the taxable year. The term "dividend" as used in § 351, is defined in § 115(a) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 703, as "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."

The legislative purpose of § 351 was to prevent tax avoidance by the device commonly called the "incorporated pocketbook," viz., a corporation formed by an individual who exchanges for its shares his personal holdings in stocks, bonds, or other income-producing property. By this means, while the income from the property is subjected to a corporation tax, a surtax against the individual is avoided by not distributing the income of the corporation.²

The stock distributed to the shareholders of the taxpayer as a dividend was income taxable to the shareholder on the basis of its actual market value when received.³

While the stock of the Tramway Corporation was carried on the books of the taxpayer at its value on the date of acquisition of $110,654.64, at the time of the distribution in 1934 it had depreciated in value down to $1,068.33, and what the taxpayer actually distributed as a dividend to the shareholders and what the latter actually received was stock of the value of $1,068.33.

It may be that good accounting practices required the stock to be carried on the books of the taxpayer at cost. But this was true for the reason that for income tax purposes of the taxpayer no gain or loss...