Jewel Tea Co. v. United States, 190.

• Decision Date: 07 June 1937
• Docket Number: No. 190.,190.
• Citation: 90 F.2d 451
• Parties: JEWEL TEA CO., Inc., v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

90 F.2d 451 (1937)

JEWEL TEA CO., Inc., v. UNITED STATES.

No. 190.

Circuit Court of Appeals, Second Circuit.

June 7, 1937.

Sage, Gray, Todd & Sims, of New York City, and Charles D. Hamel and John Enrietto, both of Washington, D. C. (Alan E. Gray and C. F. Rothenburg, both of Washington, D. C., of counsel), for appellant.

Lamar Hardy, U. S. Atty., of New York City (Edward J. Ennis, Asst. U. S. Atty., of New York City, of counsel), for the United States.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal from a judgment for the defendant in an action under the Tucker Act (24 Stat. 505) to recover income taxes, erroneously collected. The question is whether the plaintiff was right, under section 23 (f) of the Revenue Act of 1928, (26 U.S.C.A. § 23 (f) and note), in deducting in the year 1929 the premiums paid by it upon the redemption of what remained outstanding of its preferred shares. These had been issued — to a par value of $4,000,000 — for cash and property, under an agreement which provided that the company should each year acquire $120,000 of them "out of the surplus profits of the Company, if sufficient, after all cumulated and defaulted dividends (if any) upon said Preferred Stock shall have been paid, or set apart." This was to be accomplished either by redeeming them at $125 or by buying in the market at no more than that price. This provision was cumulative; that is to say, if the profits were not enough in one year, the deficit should be made up whenever they became so. The company might also redeem the whole or any part of the issue at its pleasure at the same price. It must accumulate an earned surplus of $500,000 above all obligations before paying any dividend on the common shares, and of one million dollars before paying more than six per cent. "Upon any dissolution, liquidation, merger or consolidation, * * * whether voluntary or involuntary (except in the event of insolvency or bankruptcy), or upon any distribution of capital" the preferred shareholders were to receive $125 for each share and all past dividends. "In the event of any dissolution or liquidation * * * by reason of its insolvency or bankruptcy," they should be preferred as to past dividends, and receive the par of their shares. They were to have no right to vote until two quarterly payments of dividends were in arrears, when the sole voting power, though only to elect directors or to change the by-laws, went to them until the arrears were paid. The case involves the premiums paid by the company upon the purchase in the market of 5,381 shares between July 15, 1929 and February 12, 1929, and upon the voluntary redemption of the whole remainder of the issue, 20,219 shares, on April first of that year. No question is made as to the purchase of that part of the 5,381 shares bought before January 1, 1929.

United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, decided that if a company bought in its bonds at a discount, a taxable gain emerged; the theory being, as we understand it, that thereupon the borrowed money became pro tanto a profit by the cancellation of the debt which had theretofore offset it. (Art. 68 (1) (c) Regulations 74.) Conversely, if the company buys or retires its bonds at a premium, the premium is "a deductible expense." (Art. 68 (1) (b).) Obviously it can only be a loss under section 23 (f), (26 U. S.C.A. § 23 (f) and note), Article 68 (1) (a) of the same regulations provides that no gain or loss shall result from the issuance of shares, or from their purchase or sale, but it does not deal with their redemption. When a number of persons unite to contribute to a common enterprise, whether by lending money, or by taking shares of any sort, in one sense they all become co-adventurers; both lenders and shareholders can look only to the success of the venture for payment. If the shareholders also set up priorities between themselves, there results a hierarchy in which the lenders are merely the prior group; the preferred shareholders, like them, are limited in their return, and any eventual profit goes to the common shares. Thus it would be possible to treat preferred shares like debts; that is, as constituting merely a claim upon the company — the common shareholders. Such a view would make the common shareholders alone the company, since they alone share profits and manage the enterprise; it would treat all others as separate groups with whom they deal as third parties. It would have been an entirely logical and reasonable theory and the law might well have insisted upon it. It has not; on the contrary it has always distinguished between creditors and preferred shareholders, regarding the first as outside the corporate aggregation, and the second as embarked as owners along with the common shareholders. But it is an altogether conventional conception, and while in taxation it must be treated as real, the test cannot be merely the name given to the security....