Ramapo, Inc. v. Commissioner of Internal Revenue

• Decision Date: 06 July 1936
• Docket Number: No. 298.,298.
• Parties: RAMAPO, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

84 F.2d 986 (1936)

RAMAPO, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 298.

Circuit Court of Appeals, Second Circuit.

July 6, 1936.

D. A. Embury, of New York City (Curtis, Mallet-Prevost, Colt & Mosle, and George A. Reiss, all of New York City, of counsel), for petitioner.

Robert H. Jackson, Asst. Atty. Gen. (Sewall Key and Francis I. Howley, Sp. Assts. to the Atty. Gen.), for respondent.

Robert G. Dodge and Francis V. Barstow, both of Boston, Mass., amici curiæ.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

The taxpayer is a corporation which keeps its books and makes its income tax returns on a cash receipts and disbursements basis. During the year 1929 it was a stockholder of the American Superpower Corporation (hereafter for brevity referred to as "Superpower"). By resolutions adopted in January, May, and June, 1929, Superpower gave its stockholders rights to purchase from it at stated prices shares of common stock of the United Corporation and the Commonwealth & Southern Corporation. Some of the rights so received by the taxpayer it exercised; others it sold. It also sold some of the shares acquired by the exercise of these rights. This appeal raises questions as to how the rights shall be treated for income tax purposes. The taxpayer considered them dividend distributions by Superpower under section 115 (a) of the Revenue Act of 1928, 26 U.S.C.A. § 115 and note, and returned as dividends the fair market value of each group of rights on the respective dates on which the certificates therefor were actually received, namely, February 1, May 13, and June 24, 1929. The Commissioner likewise treated the value of the rights as dividends, but determined the value as of the dates fixed by the respective resolutions for ascertaining the stockholders of record entitled to receive them; namely, January 26, May 8, and June 18. By amended answer, however, the Commissioner moved to increase the deficiency determined by him, if he had made any errors in favor of the taxpayer. The Board of Tax Appeals ruled that the rights were not dividend distributions at all, but merely represented offers by Superpower to sell certain of its assets to its stockholders pro rata. Hence it held that the rights cost the taxpayer nothing and the entire amount received from the sale of rights constituted taxable income; and that the basis for computing the gain on the sale of shares of stock acquired by exercise of the rights was the amount paid for such shares. This produced the deficiency complained of.

There is a plain distinction between the distribution by a corporation of its own stock and of stock owned by it in another corporation. The former does not diminish the corporation's assets, and is not taxable income to its shareholders, Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570; the latter does, and, if it represents earnings or surplus, is taxable as a dividend. Peabody v. Eisner, 247 U.S. 347, 38 S.Ct. 546, 62 L.Ed. 1152. See, also, Rockefeller v. United States, 257 U.S. 176, 42 S.Ct. 68, 66 L.Ed. 186; Marr v. United States, 268 U.S. 536, 45 S.Ct. 575, 69 L.Ed. 1079; Koshland v. Helvering, 298 U.S. ___, 56 S.Ct. 767, 80 L.Ed. ___. The same distinction obtains when a corporation issues rights to purchase stock at less than its real value. If the stock is that of the issuing corporation, the rights are analogous to a stock dividend, and no taxable income is realized until the shareholder disposes of his rights or of the stock acquired by the exercise of them. Miles v. Safe Deposit & Trust Co., 259 U.S. 247, 42 S. Ct. 483, 66 L.Ed. 923. But, if the rights are to purchase stock in another corporation at less than its fair market value, the issuance of them is a distribution of corporate assets in the amount by which the value of the stock exceeds the price to be paid for it, and, if such excess represents earnings or surplus, is a dividend. This would appear to be self-evident. As this court stated in Metcalf's Estate v. Commissioner, 32 F.(2d) 192, 194: "No sound distinction can be drawn between a distribution of stock of another corporation and one of valuable rights to purchase such stock." To the same effect is Duke v. Commissioner, 18 B.T.A. 374. See, also, Appeal of Bradley, 1 B.T.A. 111, 117; Venner v. Southern Pac. Co., 279 F. 832, 840 (C.C.A. 2). If Helvering v. Bartlett, 71 F.(2d) 598 (C.C.A. 4), be deemed to hold the contrary, we cannot follow it. Of course, if full value is paid for the stock, no dividend is received by the shareholder. The controlling issue, therefore, in passing upon the correctness of the Board's decision, is whether the...