Helvering v. General Utilities & Operating Co.
| Decision Date | 08 January 1935 |
| Docket Number | No. 3720.,3720. |
| Citation | 74 F.2d 972 |
| Parties | HELVERING, Commissioner of Internal Revenue, v. GENERAL UTILITIES & OPERATING CO. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Norman D. Keller, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for petitioner.
Hugh C. Bickford, of Washington, D. C. (R. Kemp Slaughter, of Washington, D. C., and Joseph A. Slattery, of Philadelphia, Pa., on the brief), for respondent.
Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.
This is a petition to review a decision of the United States Board of Tax Appeals involving income tax of the respondent for the calendar year 1928 in the sum of $128,342.07. The opinion of the Board of Tax Appeals will be found in 29 B. T. A. 934.
The facts were stipulated, and the Board set aside a finding of deficiency made by the Commissioner of Internal Revenue in the above-named amount, and the Commissioner filed this petition to review the action of the Board.
The respondent is a Delaware corporation, with its principal offices at Baltimore, Md. It is engaged in the business of owning securities of, managing, and operating public utility properties.
On January 1, 1927, the respondent acquired 20,000 shares of no par value of the common capital stock of another corporation, the Islands Edison Company. Said 20,000 shares of stock constituted one-half of the total common capital stock of said Islands Edison Company outstanding; the remaining 20,000 shares were owned by Gillet & Co., which company is not connected with respondent nor with respondent's stockholders. Respondent acquired said 20,000 shares of common capital stock of the Islands Edison Company at a cost to it of $2,000, and set up such stock on its books at a total value of $2,000.
During the month of January, 1928, Walter Whetstone, president of the Southern Cities Utilities Company, became interested in acquiring control of a Santo Domingo company, the stock of which was owned by the Islands Edison Company. Upon inquiring of Gillet & Co., Whetstone ascertained that the entire common stock outstanding of the Islands Edison Company was owned equally by Gillet & Co. and respondent. In a conference with J. C. M. Lucas, president of respondent, Whetstone discussed the purchase of the Santo Domingo Company or the Islands Edison Company common stock and as a result thereof was given permission to make an investigation of the properties of the Santo Domingo Company. Some time in February, 1928, Whetstone informed Gillet and Lucas that his plans required the delivery of all the common stock of the Islands Edison Company, and he was informed by Gillet that his firm was ready and willing to make the sale of the 20,000 shares, owned by Gillet & Co., of the Islands Edison Company common stock, and that he (Gillet) and Lucas, president of respondent, had agreed upon the price at which the sale would be made. Whetstone was informed by Lucas that, if a sale of the 20,000 shares of the common stock of the Islands Edison Company then owned by the respondent were consummated, such a sale would be made only after respondent had distributed the Islands Edison Company shares to its stockholders, because they had been advised by their attorneys that, if sale were made by respondent, it would be subject to a tax on any profit realized on the sale and that, when the proceeds of the sale were distributed to the stockholders, the stockholders would have to pay another tax thereon. The price to be paid for the properties and generally the terms and conditions of the sale were agreed upon by Gillet, Lucas, and Whetstone, but no contract was entered into by them; it being understood and agreed between them that respondent 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, said agreement to be submitted for approval to the stockholders of the Islands Edison Company after the distribution of said stock by the respondent. Lucas never held power of attorney to sell said stock for the respondent or its stockholders.
At a meeting of respondent's directors on March 22, 1928, the matter of respondent's stock holdings in the Islands Edison Company was discussed, and it was reported as the opinion of respondent's officers that the stock was worth at least $1,120,500, and that it should be appreciated on respondent's books to that figure. Further matters discussed and action taken at that meeting are recorded in the minutes as follows:
The respondent thereupon, on March 22, 1928, simultaneously entered on its books of account, in compliance with the foregoing resolution, the following entries, with full explanation following each entry, only part of which is here set forth:
1928 Dr. Cr
March 22. Investments $1,120,500.00
Surplus arising
from appreciation
of assets $1,120,500.00
March 22. Surplus arising
from appreciation
of assets 1,071,426.25
Dividends payable 1,071,426.25
To record dividend
declared on
the Common Stock
of the Company
payable in Common
Stock of The
Islands Edison
Company at a
valuation of $56.12½
a share, * * *
March 22. Dividends payable 1,071,426.25
Investments 1,071,426.25
To record payment
of dividends
declared March
22, 1928, on the
Common Stock
of this Company
such payment being
made by delivery
of 19,090
shares of the
Common Stock of
The Islands Edison
Company at
a valuation of
$56.12½ per share
Thereupon, on March 22, 1928, in accordance with the resolution of the directors, the respondent distributed to its own stockholders 19,090 shares of the stock of the Islands Edison Company, such shares representing two shares of the Islands Edison Company stock theretofore owned by respondent for each one share of the 9,545 shares of respondent's own capital stock then outstanding. On the same date, March 22, 1928, the shares of stock were transferred on the stock records of the Islands Edison Company to the individuals receiving the distribution. After transfer of the 19,090 shares, there remained in the hands of respondent 910 shares of stock of the Islands Edison Company, which 910 shares were retained by it and a new certificate for such shares was issued to it on March 22, 1928.
On March 26, 1928, the stockholders of the Islands Edison Company (one of which was the respondent, 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 respondent 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 aforesaid 910 shares of the Islands Edison Company.
The fair market value of the Islands Edison Company stock as of March 22, 1928, was $56.12½ per share; said amount being computed in the contract dated March 26, 1928, as follows:
Total Sales Price ...................... $3,375,000
Less: Liability for bonds and preferred
stock outstanding .................... 1,130,000
__________
Net consideration for stock ............ $2,245,000
The net consideration, $2,245,000, divided by the number of shares, 40,000, gives a quotient of $56.12½ per share.
Respondent's earned surplus from operations as of December 31, 1927, was $1,360,515.96, which amount was not impaired by operating losses prior to March 22, 1928. Such surplus and all the capital of the respondent at December 31, 1927, were invested at cost in assets of the company, of which assets only $41,152 was cash. On March 22, 1928, the total cash of respondent was not more than $49,004.23.
The 910 shares of the Islands Edison Company common stock which were retained by the respondent after...
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