Strassburger v. Commissioner of Internal Revenue, 48.
Decision Date | 22 December 1941 |
Docket Number | No. 48.,48. |
Citation | 124 F.2d 315 |
Parties | STRASSBURGER v. COMMISSIONER OF INTERNAL REVENUE. |
Court | U.S. Court of Appeals — Second Circuit |
Leo Brady, of New York City, for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Morton K. Rothschild, Sp. Assts. to Atty. Gen., for respondent.
Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
This appeal presents a case where the owner of all the common stock of a corporation, which had only common stock outstanding, received a stock dividend of 50 shares (par $100 per share) of nonvoting, cumulative 7% preferred stock declared out of surplus accumulated subsequent to February 28, 1913. Appropriate entries were made in the corporation's books on account of the dividend, the surplus being decreased by $5,000 and the capital stock increased by the same amount. The question is whether such stock dividend was taxable income to the sole stockholder upon receipt thereof in 1936. The preferred stock has not been cancelled or redeemed by the corporation, nor has it been sold by the petitioner. The Board ruled that the stock dividend was taxable income.
In Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570, it was held that a dividend payable in common stock to holders of common stock was not constitutionally taxable as income because distribution of the dividend produced no change in the stockholders' proportionate interest in the corporation's net assets. Following this decision, Congress provided in section 201(d) of the Revenue Act of 1921 that a stock dividend was not taxable. 42 Stat. 228. This provision was reenacted in the later revenue acts until the case of Koshland v. Helvering, 298 U. S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, 105 A.L.R. 756, disclosed that certain stock dividends could be considered taxable income. The Revenue Act of 1936, enacted after the Koshland decision, provided in section 115(f), 49 Stat. 1688, as follows:
"(f) Stock dividends —
26 U.S.C.A. Int.Rev.Code, § 115(f) (1). It is implicit in this provision that Congress intended to tax stock dividends to the full extent of its constitutional power; and so the Regulations expressly declared. Art. 115-7, Reg. 94.
The question before us therefore comes down to whether a stock dividend in preferred stock to the sole owner of the common stock, which was the only class of stock outstanding, may be regarded as income within the meaning of the Sixteenth Amendment; in other words, whether the case is governed by Eisner v. Macomber or by Koshland v. Helvering. In the latter case at page 445 of 298 U.S., at page 769 of 56 S.Ct., 80 L.Ed. 1268, 105 A.L.R. 756, the court said: The Koshland case involved a dividend of common stock to preferred stockholders. In Helvering v. Gowran, 302 U.S. 238, 58 S.Ct. 154, 82 L.Ed. 224, the court considered a dividend of preferred stock to common stockholders. Mr. Justice Brandeis, speaking for the court, said, at page 241 of 302 U.S., 58 S.Ct. 154, 82 L.Ed. 224, that under the rule declared in the Koshland case Congress could have taxed this stock dividend. This expression of opinion would dispose of the case at bar were it not for the fact that in the Gowran case, as in Koshland, there were two classes of stock outstanding when the dividend was declared; hence the stock dividend in each of those cases changed the stockholders' proportionate interests in the net corporate assets. Here, however, there was only one class of stock outstanding and but a single stockholder, who after, as before, the dividend owned the entire beneficial interest in the net assets of the corporation. Nevertheless the rearrangement of corporate capitalization so that the petitioner held preferred as well as common stock did change the character of his corporate ownership. The preferred stock had the prior right to dividends and a preference on liquidation of the corporation; and these rights could be disposed of...
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...declares a stock dividend of preferred stock, the stockholders thereby receive taxable income. It was so held in Strassburger v. Commissioner, 2 Cir., 1941, 124 F.2d 315, now pending before the Supreme Court on certiorari. But that decision is not controlling in the case at bar, because her......
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