General Utilities Operating Co v. Helvering

• Decision Date: 09 December 1935
• Docket Number: No. 41,41
• Citation: 296 U.S. 200,56 S.Ct. 185,80 L.Ed. 154
• Parties: GENERAL UTILITIES & OPERATING CO. v. HELVERING, Com'r of Internal Revenue
• Court: U.S. Supreme Court

296 U.S. 200

56 S.Ct. 185

80 L.Ed. 154

GENERAL UTILITIES & OPERATING CO.

v HELVERING, Com'r of Internal Revenue.

No. 41.

Argued Nov. 15, 1935.

Decided Dec. 9, 1935.

Messrs. Hugh C. Bickford and R. Kemp Slaughter, both of Washington, D.C., for petitioner.

The Attorney General and Mr. James L. Monarch, of Washington, D.C., for respondent.

Mr. Justice McREYNOLDS delivered the opinion of the Court.

January 1, 1927, petitioner, general Utilities, a Delaware corporation, acquired 20,000 shares (one-half of total outstanding) common stock Islands Edison Company, for which it paid $2,000. Gillet & Company owned the remainder.

During January, 1928, Whetstone, president of Southern Cities Utilities Company, contemplated acquisition by his company of all Islands Edison common stock. He discussed the matter with Lucas, petitioner's president, also with Gillet & Co. The latter concern agreed to sell its holdings upon terms acceptable to all. But Lucas pointed out that the shares which his company held could only be purchased after distribution of them among stockholders, since a sale by it would subject the realized profit to taxation, and when the proceeds passed to the stockholders there would be further exaction. Lucas had no power to sell, but he, Gillet, and Whetstone were in accord concerning the terms and conditions under which purchase of all the stock might become possible—'it being understood and agreed between them that petitioner would make distribution of the stock of the Islands Edison Company to its stockholders and that counsel would prepare a written agreement embodying the terms and conditions of the said sale, agreement to be submitted for approval to the stockholders of the Islands Edison Company after the distribution of said stock by the petitioner.'

Petitioner's directors, March 22, 1928, considered the disposition of the Island Edison shares. Officers reported they were worth $1,122,500, and recommended an appreciation on the books to that figure. Thereupon a resolution directed this change; also 'that a dividend in the amount of $1,071,426.25 be and it is hereby declared on the Common Stock of this Company payable in Common Stock of The Islands Edison Company at a valuation of $56.12 1/2 a share, out of the surplus of the Company arising from the appreciation in the value of the Common Stock of The Islands Edison Company held by this Company, viz., $1,120,500.00, the payment of the dividend to be made by the delivery to the stockholders of this Company, pro rata, of certificates for the Common Stock of The Islands Edison Company held by this Company at the rate of two shares of such stock for each share of Company Stock of this Corporation.'

Accordingly, 19,090 shares were distributed amongst petitioner's thirty-three stockholders and proper transfers to them were made upon the issuing corporation's books. It retained 910 shares.

After this transfer, all holders of Islands Edison stock sold to Southern Cities Utilities Company at $56.12 1/2 per share. Petitioner realized $46,346.30 net profit on 910 shares and this was duly returned for taxation. There was no report of gain upon the 19,090 shares distributed to stockholders.

The Commissioner of Internal Revenue declared a taxable gain upon distribution of the stock in payment of the dividend declared March 22d, and made the questioned deficiency assessment. Seeking redetermination by the Board of Tax Appeals, petitioner alleged: 'The Commissioner of Internal Revenue has erroneously held that the petitioner corporation made a profit of $1,069,517.25 by distributing to its own stockholders certain capital stock of another corporation which it had theretofore owned.' And it asked a ruling that no taxable gain resulted from the appreciation upon its books and subsequent distribution of the shares. Answering, the Commissioner denied that his action was erroneous, but advanced no new basis of support. A stipulation concerning the facts followed; and upon this and the pleadings, the Board heard the cause.

It found: 'The respondent has determined a deficiency in income tax in the amount of $128,342.07 for the calendar year 1928. The only question presented in this proceeding for redetermination is whether petitioner realized taxable gain in declaring a dividend and paying it in the stock of another company at an agreed value per share, which value was in excess of the cost of the stock to petitioner.' Also: 'On March 26, 1928, the stockholders of the Islands Edison Company (one of which was petitioner, owning 910 shares) and the Southern Cities Utilities Company, entered into a written contract of sale of the Islands Edison Company stock. At no time did petitioner agree with Whetstone or the Southern Cities Utilities Company, verbally or in writing, to make sale to him or to the Southern Cities Utilities Company of any of said stock except the...