*77 Decision will be entered under Rule 50.
Held, gain from the liquidation of a corporation should have been recognized by petitioner (a cash basis taxpayer) in 1963 -- the year in which various securities held in the name of the liquidating corporation were delivered to a broker with instructions that new certificates be issued, pro rata, to the shareholders of the liquidating corporation, even though the certificates issued to petitioner were not received by him until early 1964.
*1632 Respondent determined a deficiency of $ 5,844.01 in petitioners' income tax for calendar year 1963. Certain questions having been resolved by the parties, the sole issue presented is whether gain from the liquidation of a corporation, in which petitioner John E. Byrne was a shareholder, should have been recognized by *79 petitioner in 1963 -- the year in which various securities (comprising in part the subject matter of the liquidation and held in the name of the liquidating corporation) were delivered by an officer of the corporation to *1633 a broker with instructions to have new certificates issued in the names of the shareholders, as opposed to 1964 -- the year in which the reissued certificates were actually received.
FINDINGS OF FACT
Petitioners John E. Byrne and Nellie A. Byrne are husband and wife, and were residents of Kansas City, Mo., at the time their petition herein was filed. Petitioners, who were on the cash receipts and disbursements method of computing income, timely filed a joint income tax return for the year 1963 with the district director of internal revenue, St. Louis, Mo. Because Nellie A. Byrne is a party to this case only by virtue of having joined with her husband in filing their Federal income tax return for the year in issue, reference to the petitioner will hereinafter be limited to petitioner John E. Byrne (hereinafter John).
During the year in issue, petitioner held a one-third shareholder interest in the George R. Byrne Lumber Co., Inc. (hereinafter the lumber*80 company). Petitioner's brother, Richard, and sister, Genevieve, held similar interests in the corporation. However, subsequent to the condemnation of the company's lumber yard in 1959, the affairs of the corporation were conducted by Genevieve and Richard. Though John was vice president and a director of the corporation, his contacts with the business were minimal. To a considerable extent, he had little idea of what was taking place within the context of the business. Richard, who was a practicing attorney, performed all of the legal functions associated with the company, and Genevieve assumed most of the supervisory and administrative responsibilities.
In 1963, the lumber company's accountants advised Richard and Genevieve that, since the corporation had not been active for several years during which time it had had to pay personal holding company taxes, liquidating it would be in the best interest of all concerned. The company's accountants also stressed the desirability of liquidating during 1963 so as to avoid a personal holding company tax for the 1964 calendar year. Accordingly, the directors of the company, on June 11, 1963, resolved to liquidate the corporation. Though*81 it appears that petitioner was not apprised of this meeting, he did attend a meeting of the shareholders on June 13, 1963, at which time the resolution promulgated at the June 11 directors meeting was approved as follows:
Resolved, that the resolutions of the Board of Directors adopted at the meeting of the Board held on Tuesday June 11, 1963 in favor of the immediate dissolution of the George R. Byrne Lumber Co., [be] and [sic] are hereby approved, and that we holders of common stock of the company, hereby consent that the corporation *1634 be dissolved forthwith pursuant to the provision of the laws of the State of Kansas, and that the officers and directors of the company be and are hereby authorized to take all the necessary and proper action to effectuate such dissolution and to wind up the business affairs of the company, and that we hereby signify our consent in writing to such dissolution.
Petitioner next met with his brother and sister, in their capacity as coshareholders, on December 30, 1963. At this time Genevieve informed him of the assets he could expect to receive as a result of the liquidation. At this time petitioner also received a letter from the corporation*82 enumerating the assets to which he was entitled, and a Form 1099L U.S. Information Return which had been prepared by the company's accountants and indicated receipt by him, during the year 1963, of his prorata share of assets which were to be distributed. Among the assets enumerated in the letter which petitioner received from the corporation were various securities which had been held in the name of the corporation, the likely distribution of which within the year 1963 petitioner had been made aware of at an earlier time.
Sometime subsequent to December 25, 1963, and prior to December 31, 1963, Genevieve, acting as agent for the corporation, delivered these securities to a broker, B. C. Christopher & Co., with instructions that new certificates be issued the three shareholders in accordance with their ownership interest in the corporation. The stock certificates were endorsed in favor of the respective distributees, and were accompanied by a certificate of transfer whereby the transfer agents for the various corporations were given an irrevocable power of attorney to transfer ownership of the shares of stock on the corporate books. The market value of the certificates which*83 were to be reissued in petitioner's name equaled $ 28,329. None was received by petitioner prior to January 1964. Petitioner's return for the year 1963 contained the following statement:
Although Form 1099L shows distribution to taxpayer in the liquidation of George R. Byrne Lumber Co., Inc. including securities valued at $ 28,329.00, these securities were actually not received by taxpayer until 1964, and the gain represented by their receipt will be treated as taxable income in taxpayer's 1964 income tax return. None of these securities were issued in the name of taxpayer until January 9, 1964 or subsequent thereto and none of such securities were made available to this taxpayer at any time prior to January 9, 1964. See Reg. 1.301-1(b) illustrating the fact that distributions by a corporation made in one year but not received by the shareholder until the following year, although they are to be valued at the values on the distribution date, are not taxable by the shareholder until actually received.
Consistent with their desire to adhere to the advice received from the corporation's accountants, all other steps necessary to the formal dissolution of the corporation were accomplished*84 by Genevieve and Richard during 1963.
*1635 OPINION
*85 The facts of this case are similar to those which we had before us in
the mere turning over of assets to liquidating trustees does not constitute receipt of the property by the stockholders for tax purposes. * * *
The petitioner did not actualy receive the stock in 1930 and the delivery of the securities to McLean [the attorney acting for the corporation] did not amount to constructive receipt. * * * [
However, in reaching its result, *86 the Court also looked to other factors which are not present in the case at bar. Among the other factors considered was the question of whether the liquidating corporation intended that delivery to McLean would constitute delivery to the *1636 corporation's stockholders. Addressing itself to this question, the Board arrived at the following conclusion:
The officers of the corporation were charged by statute with the liquidation of the corporation's affairs as promptly as possible. As a means to that end, they designated McLean to receive the property and distribute it in proper proportions to those entitled thereto. * * * That the corporation did not intend delivery of the stock to McLean or the broker as conveyance of title or delivery, actual or constructive, to the stockholders, is shown by the corporate letters of December 29, 1930, and January 12, 1931. The whole record shows an intention to withhold delivery of the assets until the stocks had been reissued to the stockholders in the proper proportions. [Emphasis supplied.]
Because the directors of the lumber company in the case at bar intended that delivery to the broker would constitute delivery to petitioner, *87 we believe it is necessary to extend our investigation beyond the Hatfield case in disposing of the question before us.
The problem of what constitutes receipt under
there is nothing to show that petitioner could have obtained payment on December 31st, he did not expect this and the practice shows the company had no intention to make actual payment on that day. Nothing indicates that it recognized an unrestricted right of stockholders to demand payment except through checks sent out in the usual way. The checks did not constitute payments prior to their actual receipt. The mere promise or obligation of the corporation to pay on a given date was not enough to subject to petitioner's unqualified demand "cash or other property"; and none of the parties understood that it was.
For a similar result under analogous circumstances, see
In the light of the excerpt from Avery v. Commissioner, cited above, we are not persuaded that the logic of the Avery case may be extended to the case at bar. In the first place, in the case before us the intent of the corporation was not to defer the receipt of the shares of stock by its stockholders, but rather to vest in its stockholders the ownership interest in such shares prior to the calendar year 1964 so as to avoid personal holding company status for that year. In this regard, albeit new certificates were not issued until 1964, the lumber company's directors did all that was required to divest the corporation of its ownership interest in the shares prior to the close of 1963. Under analogous circumstances, such conduct by a corporation has been enough to preclude the Avery rationale and to cause recognition in the earlier of 2 possible years. Hence, in
Thus by November 1, 1928, the stock was out of the hands of the corporations declaring the dividend, and they no longer had possession of the certificates of stock representing the dividend. How soon the stockholders entitled to the dividend would receive the certificates depended upon the speed with which the transfer agent worked.
* * * *
Whether the taxpayer received her certificates or whether they would have been delivered to her on demand, in the calendar year 1928, is, of course, purely speculative, but it is not vital to our discussion. The declaring corporations had done all that it was possible for them to do to transfer title to the shares to the stockholders.
* * * *
The intention of the declaring corporations was that title*91 to the dividends passed at the time of declaration or, at the latest, at the time of delivery of the certificates to the transfer agent.
*1638 Similarly in
While it may be true that a division or distribution by a corporation is not taxable to a stockholder who is on the cash receipts and disbursements basis until the amount of the distribution is made available to him, this does not mean that, when stock of one corporation is distributed by another, the certificate itself must actually be received before there can be taxable gain. Since a person may be a stockholder in a corporation without ever having received a stock certificate, the time of the actual receipt of the stock certificate is immaterial. The question is, When did the taxpayers become the beneficial owners of the stock of the Salt Creek Producers Association, Inc.? We think they became the owners thereof in 1918 by virtue of the resolution distributing the stock. 2
*93 Additionally, we find difficulty in extending the Avery rationale to the case at bar because of the nature of the assets which we have before us. In contrast to the dividend checks which were mailed in Avery, the assets delivered in this case were certificates of stock which, though *1639 prima facie evidence of an ownership interest in a corporation, need not be issued to constitute one a stockholder of that corporation.
Shares of stock and certificates for shares of stock are different legal entities. Shares of stock "are intangible and rest in abstract legal contemplation." They are the interest or right which the owner has in the management, profits and assets of a corporation. 14 C.J. §§ 506, 509. Though incorporeal, *94 they nevertheless are property and are the subject of conversion. 14 C.J. § 509; 7 R.C.L. § 166;
From the above it follows that an economic interest in a corporation*95 may arise through a certificate of stock evidencing such interest has not yet been issued in the name of the owner. Such has been the case where, although certificates originally issued were rendered void as a result of undercapitalization, the court, in the absence of new certificates, looked to other factors to establish the continued proprietary interest of the shareholders during the year in question (
Moreover, where certificates of stock have been issued and are outstanding, conveyance of the shareholder interest represented by such certificates may be accomplished by means other than actual manual tradition of the certificates to the intended transferee.
As to * * * [the seller's] stock, while it was not delivered to * * * [the buyer] *97 until 1920, the evidence shows that * * * [the seller] considered that after he had endorsed it and turned it over to his attorney * * * [in the earlier year] he had nothing further to do with it and that he had surrendered it.
In accord with this view is
Given the foregoing, the central question in this case is whether, within the intendment of
We start with the proposition that it is "customary for brokerage houses to carry the legal title to stocks in the names of designated nominees and to transfer beneficial ownership by entries on the books of the nominee or of the brokerage house."
*99 We believe the result we have reached is not only consonant with the realities of the case at bar, but is also strongly indicated by an analogous line of tax cases where delivery of a gift of endorsed certificates of stock to a third party with the intent that such act would vest in the intended donee all beneficial rights attached to the stock, has been deemed sufficient to divest the donor of all dominion and control, and to constitute the third party a trustee on behalf of the donee.
In the instant case we think it is clear from the testimony of Genevieve and her brother Richard -- the two active directors of the corporation -- *101 that Genevieve, acting on behalf of the corporation, intended to vest in petitioner a full present interest in his prorata share of the endorsed certificates, to be effective the moment they were placed in the custody of the broker. Accordingly, in conformity with the cases cited above, we believe petitioners received a present beneficial interest in such shares in the year 1963.
To reflect the agreement reached by the parties,
Decision will be entered under Rule 50.
Footnotes
1. All statutory references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended.
Pertinent regulations under
sec. 451 are as follows:Sec. 1.451-2 . Constructive receipt of income.(a) General rule↩. Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. * * *
2. A similar result was reached in the case
Edmund I. Kaufmann, 46 B.T.A. 924 (1942) , affd.136 F. 2d 356 (C.A. 4, 1943) revd.136 F. 2d 366 (C.A. 7, 1943), 137 F. 2d 524 (C.A. 3, 1943), where the Board, in holding that shares of stock were to be regarded as having been received in the earlier of 2 possible years, employed the following rationale:"The uncontradicted evidence here is to the effect that the Rosenthal Co. not only decided and intended in 1933 to distribute to its stockholders all of the stock of Associates, but also that it voted at the meeting of August 10, 1933, to make such distribution on August 15, 1933. The Rosenthal Co. thus became obligated to pay the dividend on August 15, 1933, and the subject matter of the dividend, i.e., the 1,500 shares of Associates stock, was earmarked and segregated from other corporate assets by specific description thereof in the resolution by which the dividend was voted. The stock was thereafter held by the Rosenthal Co. as trustee for its stockholders and it was powerless to rescind its action as to such distribution.
Commissioner v. Scatena, 85 Fed. (2d) 729 . It follows, therefore, that the petitioners, on August 15, 1933, had an absolute and fixed right to receive the stock of Associates. Estate of Henry W. Putnam, supra; Falmouth Co., supra."Shares of stock are the interest or right which the owner thereof has in the management, profits, and assets of the corporation, while stock certificates are mere symbols or paper evidences of the ownership of the shares and are not the stock itself. One may be a shareholder in a corporation without ever receiving a certificate of stock therein; and a shareholder may sell his interest in and pass title to the stock prior to delivery of certificates thereof if such was the intention of the parties. * * * [Citations omitted.]" Compare
Louis F. Timmerman, 42 B.T.A. 188">42 B.T.A. 188↩ (1940), where certificates of stock received in a corporate liquidation were valued on the date of actual delivery, as opposed to the earlier date of distribution, on the ground that whatever beneficial ownership rights might otherwise have attached to the liquidating corporation's shareholders prior to the receipt of the distributed shares and subsequent to their actual distribution were, on the facts, without economic value since the distribution resolution of the liquidating corporation provided that distribution would not take place until the occurrence of a specified event, the date of which was unknown to its shareholders.3. Compare
Webb v. Commissioner, 67 F. 2d 859↩ (C.A. 2, 1933) where the petitioner was deemed to have received stocks held in a brokerage account gratuitously established in her favor by another, even though the account was terminable by and subject to the supervision of the other party.