Gibson v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 09 July 1941 |
| Docket Number | Docket No. 100433. |
| Parties | HELEN WHITNEY GIBSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frederick E. Winkler, Esq., for the petitioner.
George R. Sherriff, Esq., for the respondent.
The respondent determined a deficiency of $5,226.61 in the petitioner's income tax for the year 1936, consequent on his holding that "the value of the rights received from the Manufacturers Trust Company, determined to be $12,255.00 is considered to be a taxable dividend under section 115 of the Revenue Act of 1936."
The single issue is the taxability of warrants issued to the petitioner, a stockholder of Manufacturers Trust Co., for rights to purchase convertible preferred stock of that company at a designated price.
FINDINGS OF FACT.
The facts were stipulated and are found accordingly. In so far as material to the issue, they are substantially as follows:
The petitioner resides at Locust Valley, Nassau County, New York. On June 15, 1936, she was the owner of 24,510 shares of the common capital stock of Manufacturers Trust Co., hereinafter called Manufacturers.
On or about May 20, 1936, the president of Manufacturers sent a letter to its stockholders. The letter proposed that the capital of the corporation be increased by authorizing 500,000 shares of convertible preferred stock, at a par value of $20 a share, to be issued at a subscription price of $50 a share plus accrued dividends.
On June 9, 1936, Manufacturers duly filed a "Certificate of Increase of Capital Stock and Classification of Shares of Manufacturers Trust Company Pursuant to Section 36 of the Stock Corporation Law," and thereby was authorized to increase its capital by issuing 500,000 shares of convertible preferred stock, par value $20. The owner of any convertible preferred stock has the right to convert his convertible preferred stock into common capital stock at any time prior to July 15, 1946. Prior to the filing of such certificate Manufacturers had outstanding only one class of stock.
On June 10, 1936, the president of Manufacturers advised the stockholders by letter that the plan for the increase of the capital stock and the creation of the convertible preferred stock had been approved at a stockholders' meeting. On the same day the board of directors of Manufacturers adopted a resolution authorizing the officers to offer 494,025 shares of the newly created convertible preferred stock to the stockholders. The board of directors also approved forms of warrants and directed that the warrants be transmitted to the stockholders.
On or about June 15, 1936, the petitioner, as a stockholder of Manufacturers, received warrants for 24,510 rights to purchase convertible preferred stock of Manufacturers, each such right giving her the right to purchase three-tenths of one share of Manufacturers' new convertible preferred stock, par value $20 a share, at a price of $50 a share. Such warrants became null and void if not exercised before 3 p. m. on July 15, 1936. Each right received by the petitioner, on the date of receipt thereof by her, had a fair market value of 50 cents per right, or a total fair market value of $12,255, for all rights received by her.
At all times during the year 1936 Manufacturers had a surplus in excess of $13,687,428.54. Manufacturers made no transfer from its surplus to its capital account by reason of the issuance or exercise of the rights. Upon the exercise of the rights to acquire convertible preferred stock Manufacturers credited its capital stock account with $20 for each share (being the par value of the stock), and credited the balance of the $50 to the paid-in surplus account.
After the receipt of the warrants evidencing rights, the petitioner sold the rights at various times during the taxable year 1936 for a total selling price of $13,728.04.
The sole issue is whether or not the petitioner, owner of common stock of Manufacturers, is taxable on the fair market value of pro rata rights, evidenced by warrants, to subscribe to the preferred stock of Manufacturers, when such rights were received.
It is unnecessary to indulge in an extended discussion of the case of Eisner v. Macomber, 252 U. S. 189, or its history, interpretation, and effect upon the taxability of stock dividends. It is sufficient to state that, following that decision, it was generally accepted that all stock dividends were exempt from taxation. See Koshland v. Helvering, 298 U. S. 441. Ensuing Revenue Acts (those of 1921, 1924, 1926, 1928, 1932, and 1934) specifically reflected that theory by providing that "a stock dividend shall not be subject to tax."
While Congress was considering the Revenue Act of 1936, the decision in the Koshland case was rendered. The Supreme Court there said:
Although Eisner v. Macomber affected only the taxation of dividends declared in the same stock as that presently held by the taxpayer, the Treasury gave the decision a broader interpretation which Congress followed in the Act of 1921. Soon after the passage of that Act, this court pointed out the distinction between a stock dividend which worked no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more shares of precisely the same character, and such a dividend where there had either been changes of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the stockholder after the distribution was essentially different from his former interest. Citing United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536. Nevertheless the successive statutes and Treasury regulations respecting taxation of stock dividends remained unaltered. We give great weight to an administrative interpretation long and consistently followed, particularly when the Congress, presumably with that construction in mind, has re-enacted the statute without change. The question here, however, is not merely of our adopting the administrative construction but whether it should be adopted if in effect it converts an income tax into a capital levy.
We are dealing solely with an income tax act. Under our decisions the payment of a dividend of new common shares, conferring no different rights or interests than did the old — the new certificates, plus the old, representing the same proportionate interest in the net assets of the corporation as did the old, — does not constitute the receipt of income by the stockholder. On the other hand, where a stock dividend gives the stockholder an interest different from that which his former stock holdings represented he receives income. The latter type of dividend is taxable as income under the Sixteenth Amendment. Whether Congress has taxed it as of the time of its receipt, is immaterial for present purposes.
Thereafter Congress enacted section 115 (f) (1) of the Revenue Act of 1936, which reads as follows:
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * * * * * *
(f) STOCK DIVIDENDS. —
(1) GENERAL RULE. — A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.
Article 115-7 of Regulations 94 states the matter in positive, rather than negative, form and interprets that section as follows:
ART. 115-7. Stock dividends.—A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall be treated as a dividend to the full extent that it constitutes income to the shareholders within the meaning of the sixteenth amendment to the Constitution. * * *
Dividends are includible in gross income under the broad provisions of section 22 (a) of the Revenue Act of 1936.1 Subdivision (d) of that section is as follows: Section 115 (a) defines the term "dividend." We agree with respondent's interpretation of section 115 (f) (1) that, while exemptive in phraseology, its effect is to include in taxable dividends rights to acquire stock (represented here by assignable warrants), provided only they are not exempt on Constitutional grounds. That this interpretation was intended by the Congress is clearly evident when we read section 27 (e) of the Revenue Act of 1936 dealing with dividends paid credits. It reads:
SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
* * * * * * *
(e) TAXABLE STOCK DIVIDENDS. — In case of a stock dividend or stock right which is a taxable dividend in the hands of shareholders under section 115 (f), the dividends paid credit with respect thereto shall be the fair market value of the stock or the stock right at the time of the payment.
In John M. Keister, 42 B. T. A. 484, a case arising under the 1936 Act, we held that a stock dividend paid in preferred stock to holders of common stock was a taxable dividend. Koshland v. Helvering, supra. The stockholder's right to purchase new stock is essentially analagous to a stock dividend. Miles v. Safe Deposit & Trust Co., 259 U. S. 247.
In Palmer v. Commissioner, 302 U. S. 63, addressing itself to this general question, the Supreme Court said:
On the other hand, such a sale, if for substantially less than the value of the property sold, may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend. The necessary consequence of the corporate action may be in substance the kind of a distribution to stockholders which it is the purpose of section 115 to tax as present income to stockholders, and such a transaction may appropriately be deemed in effect the...
To continue reading
Request your trial