Kirkland v. Burnet, 5355.
| Decision Date | 14 March 1932 |
| Docket Number | No. 5355.,5355. |
| Citation | 57 F.2d 608 |
| Parties | KIRKLAND v. BURNET, Commissioner of Internal Revenue. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Harvey D. Jacob and Walter A. Bolinger, both of Washington, D. C., for appellant.
G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, John MacC. Hudson, C. M. Charest, and William E. Davis, all of Washington, D. C., for appellee.
Before MARTIN, Chief Justice, and ROBB and GRONER, Associate Justices.
This is a petition for review of a decision of the Board of Tax Appeals. The facts are stipulated and may be summarized as follows:
Petitioner acquired shortly prior to February 28, 1923, as an original subscriber for cash, 3,300 shares of United Baking Company preferred stock at a cost of $330,000, and received as a bonus 3,300 shares of no par value common stock of the same company. The United Company was reorganized in 1924 under the name of Continental Baking Corporation, and petitioner exchanged all of his stock of United Company for Continental stock upon the following basis: For each share of United preferred stock, one share of Continental preferred and one share of Continental class B common, and for each share of United common, one share of Continental class A common and two shares of Continental class B common, as a result of which he received altogether 3,300 shares of preferred, 3,300 shares of class A, and 9,900 shares of class B Continental stocks.
It is stipulated that the exchange was one contemplated by section 203 (b) (2) of the Revenue Act of 1924, 26 USCA § 934 (b) (2), and that no gain or loss resulted from the exchange.
During the year 1925, petitioner sold, at various per share prices, 3,300 shares of preferred stock, 1,200 shares of class A stock, and 3,700 shares of class B stock for an aggregate amount of $556,699.50, thus receiving $226,699.50 in excess of the total of his original investment, while still retaining 2,100 shares of class A stock and 6,200 shares of class B stock. The market values of the stocks acquired by petitioner in the exchange at that time were $92.50 per share for preferred stock, $109.75 per share for class A stock, and $20.75 per share for class B stock. The Commissioner, in determining the gain realized, apportioned the original cost, namely $330,000, among the classes of stock received in exchange, using as a basis the market value of the stocks received in the exchange as of the date of the exchange. The result of this was to make it appear that each share of Continental preferred acquired in the exchange cost petitioner $34.972, and each share of class A $41.493, and each share of class B $7.845 (1 preferred $34.972, 1 class A $41.493, 3 class B $23.535, equal to $100, the cost of 1 preferred and 1 common in the old company). Upon the basis of cost so allocated, the Commissioner increased petitioner's taxable income from $226,699.50, as reported by him, to $362,473.80, and determined a deficiency in tax of $16,834.29. The Board of Tax Appeals approved the Commissioner's determination.
It is stipulated it was impracticable at the time of the original purchase to apportion the $330,000 paid for the United Company's stocks between the preferred and common stocks acquired at that time; in other words, that there was no practicable way in which to ascertain the per share cost to petitioner of the preferred and common stocks of the United Company, respectively.
Petitioner now insists that, since it is admitted that at the time of his original purchase it was impracticable to apportion the purchase price between the preferred and common stock of the United Company, he is entitled to offset his total original cost against the sale price of the stocks sold in 1925 before he can be said to have realized any profit, and relies upon article 39, Regulations 65, construing the Revenue Act of 1924, which is as follows: "* * * Where common stock is received as a bonus with the purchase of preferred stock * * * the total purchase price shall be fairly apportioned between such common stock and the * * * (preferred stock) purchased for the purpose of determining the portion of the cost attributable to each class of stock, * * * but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock * * * will be realized until out of the proceeds of sales shall have been recovered the total cost. * * *"
The Commissioner, on the other hand, insists that the rule is applicable only where the original stock is sold or disposed of in part and not as a whole. Hence, he says, the basis of the old stock is unaffected by any question as to the practicability of allocating its cost to the two classes, since all that stock, preferred and common, was exchanged as a whole for the new stock, which we understand to mean that the 3,300 shares of preferred and 3,300 shares of common stock in the original company were exchanged as a whole for the 3,300 shares of preferred, 3,300 shares of class A, and...
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Seigle v. CIR, 8083.
...in the pending case met with the disapproval of the courts in Taylor v. Commissioner, 2 Cir., 70 F.2d 619, and Kirkland v. Burnett, 61 App.D.C. 88, 57 F.2d 608. In each of these cases certain securities were acquired in bulk without allocation of costs among the several items which were lat......