Hearn v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 9660
| Decision Date | 26 January 1928 |
| Docket Number | 9661.,Docket No. 9660 |
| Parties | CORNELIUS HEARN, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EDWIN WEISL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
M. D. Kopple, Esq., for the petitioners.
M. E. McDowell, Esq., for the respondent.
These proceedings are for the redetermination of deficiencies in income tax of $991.57, $6,920.71, and $5,824.51 asserted against Cornelius Hearn, Jr., and $1,409.95, $7,122.16, and $17,437.45 asserted against Edwin Weisl for the calendar years 1919, 1920, and 1921, respectively.
The issues in both petitioners' cases being identical, they were, upon motion of counsel, consolidated for hearing and decision.
The allegations of error are:
1. In respect to the said preferred stock of the International Paper Co. acquired by the partnership in 1919, 1920, and 1921, the respondent refused to allow said partnership and the petitioners to stand in the shoes of the stockholders of record at the time of the declaration of such dividend, and
2. Refusal of the responent to allow the partnership of Edwin Weisl & Co., of which petitioners are members, the exemption provided in section 31 (b) of the Revenue Act of 1916, on certain stock dividends declared by the International Paper Co., and
3. The action of the respondent in adding to the income of the petitioners additional income for the years 1918, 1919, and 1920, based upon the deduction by the respondent of the value of said stock dividend from the cost to the partnership aforesaid of the stock upon which that dividend was declared.
FINDINGS OF FACT.
The following facts were agreed upon and evidenced by written stipulation between the parties:
The petitioners are individuals and are members of the firm of Edwin Weisl & Co., with their principal office at 25 Broad Street, New York City.
Prior to the first day of June, 1917, the International Paper Co., by a resolution duly adopted by its board of directors, declared a dividend on its preferred stock payable June 1, 1917, of 7½ per cent cash and 14 per cent in preferred stock and 12 per cent in common stock.
On the first day of June, 1917, the International Paper Co. had a surplus derived from earnings which had accrued prior to March 1, 1913, in an amount at least equal to the par value of said stock dividends.
In the resolution of the board of directors of the International Paper Co. declaring such dividend it was provided "that the Common and Preferred stock issued on account of such accrued dividend shall be charged against the surplus of the Company derived from earnings which had accrued prior to March 1, 1913."
The preferred and common stock issued as a stock dividend pursuant to such resolution were in fact charged against the surplus of the International Paper Co. accrued prior to March 1, 1913.
By the said resolution of the board of directors of the International Paper Co. provision was made that upon payment of said stock and cash dividend there should be stamped, printed or engraved upon the certificates of preferred stock upon which such dividends should be paid, a statement in the following form, "all deferred dividends accrued prior to October 1, 1916, paid in full."
In the years 1919 to 1921, inclusive, Edwin Weisl & Co., a copartnership of which the petitioners were members, purchased 3,976 shares of the preferred stock of the International Paper Co. which had been issued and outstanding prior to June 1, 1917, but upon which the dividend of stock and cash payable June 1, 1917, had not been collected or paid. This stock was known as "unstamped" to distinguish it from the stock upon which the dividend had been collected and paid and which bore the endorsement set forth hereinabove and was denominated "stamped."
After the purchase of such unstamped stock said Edwin Weisl & Co. received and collected the dividends of preferred and common stock and cash to which they were entitled upon said stock so purchased and had their certificates stamped as set out hereinabove.
The petitioners did not include in their income-tax returns for the years 1919, 1920, or 1921 or either of them, such stock dividends so received as being income in any one of those years.
The Commissioner of Internal Revenue, through the supervising internal revenue agent at New York, N. Y., made an investigation of the books of account and records of Edwin Weisl & Co. for the years 1919, 1920, and 1921, and the said supervising internal revenue agent made a report finding that the net income of Edwin Weisl & Co. should be increased for the three-month period ending December 31, 1919, in the sum of $8,913.50 over and above that disclosed by the return made out, and that the distribution of income therefrom was, Edwin Weisl, $27,108.71, and Cornelius Hearn, Jr., $27,108.71; and further found that the net income of said Edwin Weisl & Co. for the year ended December 31, 1920, should be increased by the sum of $35,479.06 over the net income as disclosed by its return and that the distributive share thereof was, Edwin Weisl, $72,545,21, and Cornelius Hearn, Jr., $65,918.30; and further found that the net income of said Edwin Weisl & Co. for the year 1921 should be increased by the sum of $79,334.51 over the net income disclosed by its return, and that the distributive share thereof was, Edwin Weisl, $80,635.02, Cornelius Hearn, Jr., $40,317.51; and the said supervising internal revenue agent based such findings upon the deduction of the value of such stock dividend from the cost price of said stock, this deduction not having been made by Weisl & Co., thereby increasing the income of Edwin Weisl & Co. upon the sale of such preferred stock (now "stamped") by an amount equal to the value of the stock dividend.
On the 17th day of October, 1925, the Commissioner of Internal Revenue sustained the findings of said supervising internal revenue agent by a letter in the following words:
The partnership was not a stockholder of record as of June 1, 1917, and therefore, was not entitled to the receipt of the accumulated dividends nor was it entitled to the benefits on declaration of such dividends. It is noted that in the purchase of the unstamped stock a certain amount represented a purchase of accumulated dividends which were actually due the stockholder of record at June 1, 1917, only; that the difference in the price between the stamped and unstamped stock represented the cost of these accumulated dividends.
The computations submitted by the Revenue Agent to eliminate from the purchase account that portion of the stock of the unstamped stock which was deemed to represent the cost of the accumulated dividends, has been approved by this office.
and therewith rendered to the petitioners a statement based upon such computations and findings of the revenue agent, as follows:
STATEMENT
IT : PA : 2
AAR-207-60D OCTOBER 17, 1925
In re: Cornelius Hearn, Jr., % Edwin Weisl & Co., 25 Broad Street, New
York, N. Y
1919 — Deficiency in tax ___________________________________ $991.57
1920 — Deficiency in tax
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