dissenting in part: My disagreement with the majority opinion is limited to the issue relating to the amount of earnings available for dividends. The computation of earnings for dividend purposes and of taxable income do not necessarily coincide. See Commissioner v. Wheeler, 324 U. S. 542. General Utilities & Operating Co. v. Helvering, 296 U. S. 200, decided only that a dividend declared in property did not create taxable income of the declaring corporation. It by no means follows, as the prevailing opinion assumes, that this means there were no earnings and profits available for the declaration of a dividend for purposes of determining the taxability of the stockholder-recipient.
If there were greater doubt as to this proposition, it would have to be dispelled by the Tax Court’s recent opinion in R. D. Merrill Co., 4 T. C. 955, where the distribution of property which had decreased in value was given the effect of establishing a reduction in earnings and profits measured by the difference between original cost and decreased market value; although it seems clear that the distribution was not a taxable event, and could not result in the realization of a loss for income tax purposes. First Savings Bank of Ogden v. Burnet (App. D. C.), 53 Fed. (2d) 919; see General Securities Co. v. Commissioner (C. C. A., 10th Cir.), 123 Fed. (2d) 192. With the possible inconsistency in permitting a corporation to decrease earnings and profits by distributing an asset which has decreased in value, as in the Merrill case, and refusing to permit the respondent to increase earnings and profits where the value of a like asset has increased, as in the Timken case, infra', we are not presently concerned.1 What seems manifest is that income tax effects as adjudicated in the General Utilities case and the effect on earnings and profits are not at all comparable.
The assumption that there were no earnings to cover the increase in value seems to me inadmissible in the present case for at least two reasons. In the first place the record indicates that the property in question was purchased from earnings. Certainly, if the dividend stock represented an investment of capital, petitioner, upon whom .the burden lay, has failed to show it. Accordingly, the increment in value is not an increase of capital, but is itself an additional earning. Commissioner v. Wakefield (C.C.A., 6th Cir.), 139 Fed. (2d) 280. See also Binzel v. Commissioner (C.C.A., 2d Cir.), 75 Fed. (2d) 989; certiorari denied, 296 U. S. 579. In Estate of H. H. Timken, 47 B.T.A. 494; affd. (C.C.A., 6th Cir.), 141 Fed. (2d) 625, the asset distributed was part of the corporation’s original capital and did not represent the investment of earnings.
In the second place, we are dealing here not with an outright property distribution, but vs;ith a bargain sale. The doctrine of Palmer v. Commissioner, 302 U. S. 63, upon which the main proposition in this proceeding rests, calls for treatment of a bargain sale as a dividend only where there appears an intention to invade the net worth of the corporation for the benefit of the stockholders. “For a sale to stockholders may not result in any diminution of its net worth and in that case can not result in any distribution of its profits.” But in order for a sale at cost to work a decrease of net worth, increment, which is all that is distributed, must first be considered on the asset side. Since, in this case, it is clear that it never became capital, it must have been a part of earnings.
Assume, for example, that a corporation’s accumulated earnings of $10,000 are used to purchase an investment which in the following year becomes worth $20,000. This is now “sold” to the stockholders for the original cost of $10,000. Clearly, under the Palmer case, the $10,000 of increment would then be taxable as a dividend. “ * * * the increment of value represented by the difference between the purchase price of the stock paid by the corporation in 1928 and its value in 1936, when it was sold at cost to the stockholders, was transferred by the corporation to them * * Timberlake v. Commissioner (C.C.A., 4th Cir.), 132 Fed. (2d) 259, 261. Now, however, the corporation still has in its possession $10,000 in cash which can not be considered as anything but a replacement of the fund originally invested. Since the latter was earnings and profits, in the first place, it is hard to see that the cash which replaces it does not remain earnings and profits.
Considering that it was the increment in value which constituted the dividend, it seems to me inescapable that the earnings and profits embraced that increment, as well as the original investment which was not wiped out but remained to be distributed. It follows that at least under the present facts there must have been earnings and profits of the declaring corporations sufficient to constitute the entire distribution a dividend.
See Wallace, “A Dissent/* 1 Tax Law Review, 93. 95.