National Home Owners Service Corp. v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 12 April 1939 |
| Docket Number | Docket No. 91445. |
| Citation | 39 BTA 753 |
| Parties | NATIONAL HOME OWNERS SERVICE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Robert F. Skutch, Jr., Esq., and Herbert C. Moore, Esq., for the petitioner.
Clay Holmes, Esq., for the respondent.
The Commissioner determined deficiencies in the petitioner's tax as follows:
-------------------------------------------------------------
| | Excess
Year | Income tax | profits
| | tax
---------------------------------------|------------|--------
1934 _________________________________ | $407.83 | $148.31
1935 _________________________________ | 1,097.34 | 399.03
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The issues are whether the petitioner realized taxable gain from the sale and exchange of its own stock, and, if so, the amount.
FINDINGS OF FACT.
The petitioner is a Delaware corporation organized in 1926. It filed its tax returns for 1934 and 1935 with the collector of internal revenue at Baltimore, Maryland.
The stock of the petitioner consisted of class A 7 percent preferred, and class B no par common. There were about 845 shares of the former and about 5,687 of the latter outstanding at the beginning of 1933. The petitioner then held 2,313 of its class B shares as treasury stock at a cost of 87 cents per share.
A group of stockholders, owning a large majority of the outstanding stock of the petitioner, late in 1933, purchased from an estate 235 class A and 426½ class B shares for $10,000. In order to divide their purchase in the ratio of seven B shares to one A share, and also to give the corporation a profit, they surrendered 135 of their class A shares to the petitioner in exchange for 273½ class B shares. The petitioner took the 273½ class B shares from its treasury and placed the 135 class A shares in its treasury. It also acquired 10 class A shares in 1933 from a source and for a consideration not shown in this record. It placed those 10 shares in its treasury.
Certain stockholders agreed late in December 1933 that they would pay $100 for units of one class A and seven class B shares as called upon by the corporation when, as, and if it needed additional funds. The corporation, in order to pay off its bank loans during inactive periods, made calls, issued stock, and received the agreed payments therefor as follows:
--------------------------------------
| Class A
Date | shares
| involved
----------------------------|---------
1/3/34 ____________________ | 5
3/1/34 ____________________ | 25
8/1/34 ____________________ | 5
12/31/34 __________________ | 5
1/15/35 ___________________ | 10
1/22/35 ___________________ | 20
1/31/35 ___________________ | 55
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Dividends were paid regularly on the class A shares. The book value of the class B shares was about 20 cents per share at the close of 1933. The book value of the class A shares at that time was $100 per share.
The petitioner did not report any profit from the sale of its stock either in 1934 or 1935. The Commissioner added $2,966.04 to the net income reported for 1934, representing a profit on the sale of capital stock computed as follows:
Sale price 40 shares capital stock _____________________________ $4,000.00
Cost-purchase price 10 shares __________________________ $755.83
30 shares at $1.76 each through exchange _____________ 52.80
Cost of common given as bonus __________________________ 225.33
_______ 1,033.96
_________
Profit __________________________________________________ 2,966.04
He added a profit of $7,980.65 from the sale of capital stock to the net income reported for 1935. He computed that profit as follows:
The first question is whether the petitioner realized any gain from the transactions in 1934 and 1935 whereby it received $100 per unit for units consisting of one class A share and seven class B shares of its own stock. The Supreme Court recently reviewed this question in Commissioner v. Reynolds Tobacco Co., 306 U. S. 110, affirming 97 Fed. (2d) 302, which reversed 35 B. T. A. 949. See also First Chrold Corporation v. Commissioner, 306 U. S. 117, reversing 97 Fed. (2d) 22, which had affirmed an unpublished decision of the Board. The Court stated in the Reynolds case that the statutory provisions of section 22 (a) were so general in their terms as to render an interpretative regulation appropriate. The regulations of the Treasury Department up to May 2, 1934, had uniformly held that a corporation realized no gain and sustained no loss from purchases and sales of its own stock. The Board had consistently followed those regulations, but on April 7, 1932, the Circuit Court of Appeals for the First Circuit reversed the decision of the Board in Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, reversing 21 B. T. A. 818. Certiorari was denied, 287 U. S. 613. The Commissioner thereafter issued T. D. 4430, approved May 2, 1934, reported in C. B. XIII-1, p. 36. That Treasury decision amended the regulations to provide that gain or loss might result from the acquisition or disposition by a corporation of its own shares, depending "upon the real nature of the transaction"; no gain or loss was to result from the original issuance of stock, "But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another." Although there might be some question whether this petitioner was dealing in its own stock as to all of the shares involved within the meaning of the language just quoted, nevertheless, the Treasury decision seems clearly to cover some of the transactions. The Court in the Reynolds case pointed out that the administrative construction embodied in the regulation had been uniform for a great many years during which Congress had reenacted without alteration the definition of gross income, and the Court said:
* * * Under the established rule Congress must be taken to have approved...
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