1938 BTA LEXIS 801 | B.T.A. | 1938
Lead Opinion
The parties are in virtual agreement that the test of whether the stock dividend redeemed in the tax years was
Prior to the issuance of the dividend, petitioner’s donors were common stockholders. Since there was no other class of stock outstanding their interest consisted of proportionate rights in the income of the corporation, in the powers of control, and to the proceeds of
Petitioner’s counsel contends that after the issuance of the preferred stock all of the stockholders were in exactly the same position as before. He points out that the interest each had through the ownership of common shares was thereafter represented in the same , proportion by the common and preferred shares combined, and concludes that their position before and after the dividend was as similar as it was in Eisner v. Macomber, supra. With this, however, we are unable to agree. The preferred shares were nonvoting, entitled to 7% cumulative dividends, and preferred on dissolution. It has been stated that although generally the discretion of the directors as to the payment of dividends to common stockholders will not be interfered with by a court, “different rules apply with respect to the right of holders of preferred stock to invoke the aid of a court to order the declaration and payment of dividends on their stock.” Cratty v. Peoria Law Library Association, 219 Ill. 516; 76 N. E. 707, 708. If this be so, the preferred stock for this reason alone conferred upon the stockholders a new and different privilege. But entirely' apart from this, the undeniable difference in the situation of the stockholders is that their interest, after the dividend, became'to some extent transferable in parts where before it could be disposed of only as a whole. Before the dividend, it is true, a stockholder could have sold a portion of his common shares. But, as pointed out in the Macomber case, supra, p. 212, it is “in the nature of things impossible for one to dispose of any part of such an issue without a proportionate disturbance of the distribution of the entire capital stock.” After the preferred stock was issued this was no longer true, Petitioner’s donors, by transferring the preferred stock, as in fact they did, could then dispose of a part of their interest in the earnings and assets of the corporation without in any way disturbing the distribution of voting control. Or they could retain the preferred stock as representing a property interest and divest themselves of the
Decisions of the Board which may be regarded as inconsistent with this position were all,
Finally, it is contended in a brief filed by amici awiae that apportionment of the basis is required by sections 112 and 113 of the Eevenue Act of 1934, on the ground that the dividend stock was distributed pursuant to a reorganization, the definition of which includes recap
Reviewed by the Board.
Decision will be entered for the respondent.
Kosland v. Helvering, 298 U. S. 441; Helvering v. Gowran, 302 U. S. 238.
Eisner v. Macomter, 252 U. S. 189.
See Tillotson Manufacturing Co., 27 B. T. A. 913, 917, 918; affd., 76 Fed. (2d) 189,
Revenue Act of 1934, sec. 113.
Helvering v. Gowran, supra.
“A share of stock has been defined to be a right which its owner has in the management, profits, and ultimate assets of the corporation; * * Storrow v. Texas Consolidated Compress & Manufacturing Association, 87 Red. 612, 615.
Lynch v. Hornby, 247 U. S. 339 ; Peabody v. Eisner, 247 U. S. 347.
Alfred A. Latin, 26 B. T. A. 764; Pearl B. Brown, Executriso, 26 B. T. A. 901; affd., 69 Pe6. (23) 602; certiorari denied, 293 U. S. 570; Prances Elliot Ciarle, 28 B. T. A. 1225; affd., 77 Fed. (2d) 89.
It may be seriously doubted whether the Maeomber case, even without later developments, can be said to constitute authority for petitioner’s position. The very question now before us was foreshadowed in the dissenting opinion of Mr. Justice Brandéis in that case, and its answer unfavorably to petitioner’s contention was assumed by Mm. This assumption was evidently no more than a premise for that further part of his discussion in which he departs from the reasoning of the majority, and in no sense, in his mind at least, a position in which he conceives himself to be at variance from them. He says “So far as the distribution may be made from its [the corporation’s) own issues of bonds, or preferred stoclc created expressly for the purpose, it clearly would make no difference in the decision of the question whether the dividend was a distribution of profits, that the securities had to be created expressly for the purpose of distribution. If a dividend paid in securities of that nature represents a distribution of profits Congress may, of course, taso it as income of the stoclcholder. Is the result different where the security distributed is common stock?” [Italics added.)
House Report No. 350, 67th Cong., 1st sess., p. 8; Senate Report No. 275, 67th Cong., 1st sess., p. 9.
Regulations 65 and 69, arts. 1547, 1548; Regulations 74 and 77, arts. 627, 628.
Revenue Acts of 1921, sec. 201 (d) ; 3 924 and 1926, sec. 201 (f) ; 1928, sec. 115 (f).