Helvering v. Edison Securities Corporation

• Court: U.S. Court of Appeals — Fourth Circuit
• Writing for the Court: PARKER, NORTHCOTT, and SOPER, Circuit
• Citation: Helvering v. Edison Securities Corporation, 78 F.2d 85 (4th Cir. 1935)
• Decision Date: 03 June 1935
• Docket Number: No. 3785.,3785.
• Parties: HELVERING, Commissioner of Internal Revenue, v. EDISON SECURITIES CORPORATION.

78 F.2d 85 (1935)

HELVERING, Commissioner of Internal Revenue, v. EDISON SECURITIES CORPORATION.

No. 3785.

Circuit Court of Appeals, Fourth Circuit.

June 3, 1935.

Frederick E. Youngman, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for petitioner and cross-respondent.

Thomas G. Haight, of Jersey City, N. J. (Robert H. Montgomery, of Washington, D. C., James O. Wynn, of New York City, J. Marvin Haynes, of Washington, D. C., and Roswell Magill, of New York City, on the brief), for respondent and cross-petitioner.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

This proceeding involves deficiencies in income taxes for the years 1925 and 1926 in the respective amounts of $10,471.41 and $100,210.91 of Edison Securities Corporation, a Maryland corporation. The case is brought to this court by petition for review filed by the Commissioner of Internal Revenue and by cross-petition for review filed by the taxpayer.

The first question relates to a determination by the Commissioner of the income tax deficiency for 1925, through the addition to income in that year of the sum of $180,000, which the Commissioner found that the taxpayer had received in liquidating dividends from Stevens & Wood, Inc., a Delaware corporation, in which the taxpayer controlled a substantial majority of the stock. The Commissioner therefore applied the provisions of section 201 (c) of the Revenue Act of 1926, 44 Stat. 9 (26 USCA § 932 (c), which provides in substance that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock; and that if gain results from the exchange, it shall be subject to taxation. The Board, however, held on appeal, upon the facts submitted, that the amounts in question were not distributions in liquidation, and disallowed the deficiency. This action is in part the basis of the Commissioner's petition for review.

The total sum of $180,000 was made up of three dividends declared by the board of directors and received by the taxpayer on 5,000 shares of capital stock of Stevens & Wood, Inc., that is to say: $125,000 on May 12, 1925; $17,500 on May 27, 1925; and $37,500 on October 27, 1925. An additional dividend of $7,500 was received by the taxpayer on or about May 12, 1926. The controversy is limited to the dividends declared in May, 1925, the taxpayer conceding that the subsequent dividends were liquidating dividends within the words of the section.

In our opinion, the record contains substantial evidence to support the conclusion of the Board that there was no deficiency for the year 1925. The Commissioner relies upon evidence tending to show that all of the dividends were paid in pursuance of a plan, formed before the declaration of any of the dividends, to dissolve Stevens & Wood, Inc. That corporation was organized to render engineering, construction, and managerial services to public utilities, and was given its name in recognition of the reputation of R. P. Stevens and F. B. Wood as engineers in that field. Serious differences of opinion arose between the taxpayer, the holder of the majority of the shares, and Stevens, with respect to certain policies of management; and after fruitless negotiations looking to a settlement, it was finally agreed on June 12, 1925, to dissolve the corporation. Although this date was subsequent to the declaration of the dividends whose character is in dispute, the Commissioner contends that the only logical inference from the facts is that dissolution had been previously agreed upon, and that the distribution of dividends was made prior to formal official action in order to avoid the payment of an income tax thereon. It is pointed out that the dividends were extraordinary and unusual in amount, and out of line with the previous policy of the corporation to accumulate a reserve; that Stevens had resigned and had demanded that his name be no longer used, as he had the right to do under contract with the corporation; and that he had formed another corporation, known as Stevens & Wood, Inc., to conduct a similar business. But, on the other hand, there was direct testimony that dissolution was not intended or decided upon prior to June, 1925; that in May, Stevens still hoped to be able to get control of the corporation, and to prolong its existence, and in the meantime had taken no steps to launch his new corporation upon active business; and it also appeared that the dividends declared in May, 1925, were paid out of surplus and not out of capital. An issue of fact was thus raised upon which the decision of the Board, supported as it was by substantial evidence, is binding upon this court. We find nothing in the decision of the Board at variance with the decisions of the courts which hold that a dividend may be in liquidation although paid out of surplus and earnings, but that the question whether a dividend is a liquidating dividend or an ordinary dividend is to be determined by the facts as shown by the record. See Hellmich v. Hellman, 276 U. S. 233, 48 S. Ct. 244, 72 L. Ed. 544, 56 A. L. R. 379; Gossett v. Commissioner (C. C. A.) 59 F.(2d) 365; Tootle v. Commissioner (C. C. A.) 58 F.(2d) 576; Canal-Commercial T. & S. Bank v. Commissioner (C. C. A.) 63 F.(2d) 619.

The second question in the case relates to a series of three transactions in 1926, whereby the taxpayer disposed of certain shares of common and preferred stock owned by it in Republic Railway & Light Company, a New Jersey corporation. The taxpayer's view was that all three transactions were performed in pursuance of a plan of corporate reorganization, under section 203 of the Revenue Act of 1926 (26 USCA § 934), whereby stock of the Republic Company, a party to the reorganization, was exchanged for stock in Penn-Ohio Securities Company, a Delaware corporation, also a party to the reorganization. The Commissioner, holding that the first transaction was not a reorganization, treated the entire profit therefrom as taxable, increased the taxpayer's taxable income for the year by the sum of $450,114.47, and determined a tax deficiency in the amount of $68,791.31. It was this determination that the taxpayer petitioned the Board to review; but no conflict arose as to the second and third transactions, both parties considering them as parts of a plan of corporate reorganization. The Board agreed with the Commissioner as to the first and third transactions and the taxpayer has acquiesced in this holding; but the Board held that the second transaction was not a part of the plan of reorganization, and was therefore fully taxable. This view would have justified the finding of a total tax deficiency of $100,210.91, but the Board merely sustained the Commissioner's determination within the limits of the deficiency already found since no increase had been claimed or pleaded by him.

In 1925 and 1926, the taxpayer owned common and preferred stock of the Republic Company, which had outstanding 113,974 shares, consisting of 62,060 shares of common stock and 51,914 shares of preferred, with equal voting rights. A plan of reorganization was submitted to the common stockholders, under which one share of the common stock was to be exchanged for 2 shares of no par common stock and $25 in bonds of a corporation to be formed to secure control of the Republic Company. For this purpose, the Penn-Ohio Company was incorporated on February 28, 1925, with 124,120 shares of no par stock, double the number of the shares of the common stock of the Republic Company. On April 28, 1925, the board of directors of the Penn-Ohio Company authorized the issue of its own bonds, in accordance with the plan, and by October 27, 1925, it had acquired 32,628 shares of the common stock of the Republic Company in exchange for 65,256 shares of no par Penn-Ohio Company common and $815,700 of its bonds.

Eastman, Dillon & Co., a copartnership which owned all of the stock of the taxpayer, and had financed the Republic Company, objected to the plan of reorganization as unfair to the preferred stockholders of the latter; and since 56,988 shares of the common stock out of a total 62,060 shares were necessary for control, and the taxpayer owned 11,506 shares thereof (as well as 9,993 shares of preferred stock), the plan could not be carried out without its consent. Bonbright & Co., who also owned stock in the Republic Company and had helped to finance it, favored the plan. A controversy ensued, which was finally settled by an agreement of January 29, 1926, between the taxpayer and Bonbright & Co., whereby the parties agreed to carry out the plan with amendments, more particularly described below, to provide for the exchange of the preferred stock of the Republic Company for preferred stock of the Penn-Ohio Company, to be issued, plus a certain amount of cash. At that time the parties to the agreement owned or controlled 56,439 shares of Republic stock, consisting of 32,628 shares of common stock previously acquired by Penn-Ohio Company, 2,312 shares of preferred stock owned by Bonbright & Co., and 11,506 shares of common and 9,993 shares of preferred owned by the taxpayer, so that they lacked only 449 shares of a majority. There remained 57,535 shares, consisting of 17,926 shares of common and 39,609 shares of preferred, in the hands of others.

On February 1, 1926, pursuant to the agreement of January 29, 1926, the disposition by the taxpayer of the stock of the Republic Company, which constitutes the first transaction hereinbefore mentioned, took place. Bonbright & Co. then owned (or had arranged to acquire) 12,954 shares of Penn-Ohio stock, and $391,700 of its bonds. The taxpayer transferred to Bonbright & Co. 5,753 shares of the common stock, and 3,840½ shares of the...