*844 1. Petitioners, father and son, owned all of the 180 shares, par value $50, of the stock of a manufacturing corporation, except one share held by another member of the family; the corporation, prior to 1930, conserved earnings looking to the acquisition of another plant, which idea was abandoned in 1929 without action; the directors and stockholders (being the same persons) caused the corporation to purchase 40 shares of stock from each petitioner at $12,000 per share and to pay them out of the earnings accumulated after February 28, 1913, and to reduce the corporate capital from $9,000 to $5,000. Held, the distribution made under the circumstances was essentially equivalent to the distribution of taxable dividends under section 115(g), Revenue Act of 1928.
2. Respondent's determination of fair market value of certain stocks approved.
*1076 These proceedings involve income tax liability in the amount of $48,452.06 against Elwood W. McGuire (Docket No. 75537) and $51,428.31 against Charles A. McGuire (Docket*845 No. 75538), for the year 1930, as shown in the deficiency notice mailed to the respective petitioners on February 15, 1934.
The cases were consolidated for hearing and submitted on stipulation of facts and the testimony of petitioner Charles A. McGuire which, so far as material to the issues herein, are, in substance, hereinafter set out. The principal issue presented for our determination is: Was the acquisition by the Dille & McGuire Manufacturing Co. of shares of its capital stock from the petitioners for the purpose of redemption and cancellation, under the circumstances here involved, essentially equivalent to the distribution of a taxable dividend to them to the extent of the fair market value of securities representing earnings or profits of the company accumulated after February 28, 1913, and received for the shares of stock redeemed and canceled? By amendment to the answer in Docket No. 75537, the respondent states that, in the event this Board determines that the method of reporting the gain realized in 1930 on the sale of bonds received by petitioner Elwood W. McGuire that year for 40 shares of his stock in the Dille & McGuire Manufacturing Co. is correct and that the*846 basis for computing the alleged gain is the face or par value of the bonds instead of the fair market value at the time of their receipt, he erred in reducing said petitioner's profit as reported on his return from the sale of securities (Liberty bonds) from $10,282 by $2,848.13 and in reducing the amount of taxable interest received on said Liberty bonds in the taxable year 1930 from $26,674 by $5,666.67; and the respondent - in the event of the errors mentioned - asks that said petitioner's taxable income for the year 1930 be increased by the amounts of $2,848.13 and $5,666.67.
FINDINGS OF FACT.
The petitioners, Elwood W. McGuire and Charles A. McGuire, father and son, respectively, are residents of, and have their principal place of business in, Richmond, Indiana.
The Richmond Lawn Mower Co., of Richmond, Indiana, was incorporated under the laws of Indiana on December 11, 1880, its *1077 corporate life being 50 years. Subsequently, the name of the corporation was changed to Dille & McGuire Manufacturing Co., which hereinafter may for brevity be referred to as the company.
During the year 1930 and for many years prior thereto, Elwood W. McGuire was the company's*847 president and Charles A. McGuire was its secretary and treasurer.
When the company was originally incorporated, as aforesaid, it took over the business of a partnership composed of Henry H. Dille, Elwood W. McGuire, and William H. Stanley, which had been operating under the firm name of Richmond Lawn Mower Co. Its authorized capital stock was 180 shares of the par value of $50 per share, issued one third each to said Dille, McGuire, and Stanley. About the year 1900 the McGuire family became the owners of all the stock, and still remain the owners. On January 11, 1930, Elwood W. McGuire owned 94 shares of the stock, which had been acquired by him prior to March 1, 1913, and Charles A. McGuire owned 85 shares of its stock, 5 of which he acquired in 1897 and the remaining 80 shares were acquired by a gift from his father on or about July 1, 1919. On January 11, 1930, Esther McGuire, the wife of Elwood W. McGuire and mother of Charles A. McGuire, owned one share of the stock.
Since the date of its incorporation, the company has been engaged in the business of manufacturing lawn mowers, distributed and sold through jobbers and wholesalers and retail, hardware, and department stores, *848 spproximately 40 percent of its products being sold to Sears, Roebuck & Co. stores throughout the United States. Up until about October 1929 the company had built up a foreign business for its products which was then in volume about 10 percent of its entire business and required from $150,000 to $200,000 to maintain it. The company's foreign business was affected deleteriously by the depression in that year and by the fact that foreign manufacturers of lawn mowers became more numerous. The company's business was seasonal and required considerable cash to purchase supplies, pay for manufacturing, etc.
From the date of incorporation to 1902, no dividends were paid by the company. Its books always have been kept on the basis of a fiscal year ending June 30. Beginning with its fiscal year ended June 30, 1902, it began the payment of dividends on its stock, which continued uninterruptedly until the close of the fiscal year ended June 30, 1918. For the fiscal years ended June 30, 1919, to June 30, 1922, no dividends were paid, but beginning with the Fiscal year ended June 30, 1923, the payment of annual dividends was resumed and was continued for each subsequent year up to and including*849 the fiscal year ended June 30, 1931.
*1078 The authorized capital of $9,000 was never adequate for the business conducted by the company. Since the year 1918 its capital requirement had been around $1,250,000, which was attained about the close of the fiscal year ended June 30, 1924, by the accumulation of earnings for capital uses.
The business of Sears, Roebuck & Co. in lawn mowers was large and very desirable to the company. Several years prior to 1930 its officers reached the conclusion that, to hold its business with Sears, Roebuck & Co., which contemplated establishing several mail order stores in the eastern states, it would have to establish a plant in the East, somewhere near the seaboard in the New England States, as the freight rates to those states operated to the disadvantage of the company in the sale of its products there. The officers of the company contemplated either building or acquiring a new manufacturing plant in the East and to that end began to conserve earnings for such purpose, under the belief that the execution of such purpose would require a fund of from $750,000 to $1,000,000. The purpose of establishing a plant in the East as indicated*850 was kept under consideration and earnings accumulated with that object in view until about October 1929, when the depression came upon the country, and then the establishment of an eastern plant was no longer deemed advisable. The large earnings which had been accumulated for the purpose stated and had been invested in securities of a readily realizable value were not needed in the ordinary business of the company. The plant at Richmond, Indiana, however, was improved and enlarged.
On March 16, 1929, "The Indiana General Corporation Act" was enacted, effective July 1, 1929. Under its provisions the then existing corporations, subject to the limitations and restrictions imposed on them "by law or the articles of incorporation", had the right to continue as corporations under their corporate names for the period limited in their articles of incorporation, or, if the period was not so limited, "then perpetually." Reorganization of existing corporations was also provided for in that act, upon their availing themselves of its benefits by complying with its provisions.
The original charter of the company would have expired December 11, 1930, and in order for it to continue its business*851 as a corporation its officers began in the year 1929 to take steps to secure articles of reorganization under said act of March 16, 1929.
On October 16, 1929, the board of directors of the company instructed its secretary to give notice of a special stockholders' meeting to be held on January 11, 1930, "to vote on the reduction of the capital stock of the company", which notice was duly given.
On January 11, 1930, a stockholders' meeting was held, 179 shares being represented by the petitioners in person as the owners thereof *1079 and one share by Elwood W. McGuire, holding the proxy of his wife, Esther McGuire. The chairman reported that the charter of the corporation would expire December 11, 1930, and that it would be necessary to reorganize the corporation and that, anticipating such reorganization, a thorough and complete audit of the books of the company had been made. A summary of the audit was presented and, after full discussion, the following resolution was unanimously adopted:
RESOLVED: That this Company purchase at its book value forty shares of the capital stock of this company held by Elwood W. McGuire, and forty shares held by Charles A. McGuire, and*852 hold the same as the property of and in the treasury of the company until the capital stock of the company can be reduced to one hundred shares of the par value of fifty dollars each, and that the officers take such action as may be necessary to effect such purchase.
BE IT FURTHER RESOLVED, That upon the surrender of the certificates representing such stock and upon the reduction of the capital stock to one hundred shares of the par value of fifty dollars each, the President and Secretary be and they are hereby authorized and directed to cancel such certificates.
After the adoption of the foregoing resolution, another resolution was presented and also unanimously adopted, reducing the capital stock of the corporation, subject to the approval of the Secretary of State of Indiana, from 180 shares of the par value of $50 per share to 100 shares of the same par value per share. Immediately after adjournment of the stockholders' meeting, a meeting of the board of directors was held and it was, on motion, ordered that $12,000 per share be paid for 40 shares of the company's stock to be purchased from each of the petitioners.
On January 11, 1930, the surplus account of the company*853 was debited with the amount of $960,000 and the individual accounts of Elwood W. McGuire and Charles A. McGuire were each credited with the amount of $480,000.
On January 25, 1930, certificate No. 54, for 80 shares of stock issued to Charles A. McGuire on July 1, 1919, was surrendered to the company and a new certificate, No. 55, for 40 shares of stock was issued to him. Also, on January 25, 1930, certificates Nos. 27 and 28 for 15 shares each and certificate No. 29 for 10 shares, issued to Elwood W. McGuire on June 3, 1890, and February 14, 1891, were surrendered to the company. The certificates of stock surrendered on January 25, 1930, were canceled.
On January 25, 1930, the board of directors of the company authorized its officers to make application to the Secretary of State of Indiana for the reorganization of the company, under and pursuant to the Indiana General Corporation Act of March 16, 1929, and also on January 25 the stockholders of the company approved the action of the board of directors, and on the same date the company was granted authority by the Secretary of State of Indiana*1080 for the reduction of its capital stock from $9,000 par value to $5,000*854 par value.
On February 4, 1930, the company was granted articles of reorganization under the Indiana General Corporation Act for perpetual existence.
On April 1, 1930, the capital account of the company was debited with the amount of $4,000 and the surplus account was credited with $4,000.
On January 25, 1930, the individual account of Elwood W. McGuire was debited with the amount of $480,000, and there was paid to him by the corporation that amount in face value, Fourth Liberty Loan bonds, for his 40 shares of stock in the company. The Liberty Loan bonds, together with accrued interest to date of payment, received by Elwood W. McGuire had a market value of $490,316.67 at the time that they were paid to him.
On March 17, 1930, the individual account of Charles A. McGuire was debited with the aggregate amount of $479,972.50, which was paid to him by securities of a face value of: County and school bonds, $296,972.50; Federal land bonds, $96,000; and Fourth Liberty Loan bonds, $84,000. These securities were delivered to Charles A. McGuire by the company for the 40 shares of stock transferred to it as aforesaid. At the date of the receipt by Charles A. McGuire of the aforesaid*855 securities, their market value, together with accrued interest to date of payment, was $489,638.04. Also, at the same time, he received a credit of $27.50 to make up the amount of $480,000 for his 40 shares of stock, and this $27.50 was left as a credit to his individual account.
Each of the petitioners considered the amount paid to him as aforesaid by the company as the consideration for the shares of stock transferred to the company and computed the tax from the transaction under the capital gain provisions of the Revenue Act of 1928.
The gains were computed on the respective returns of the petitioners for the year 1930 as follows:
| ELWOOD W. MCGUIRE | ||
| Sales Price of Forty Shares of Stock | $480,000.00 | |
| March 1, 1913 Value at $2,441.44 per Share | 97,657.00 | |
| Capital Gain | $382,342.00 | |
| CHARLES A. MCGUIRE | ||
| Sales Price of Forty Shares of Stock | $480,000.00 | |
| March 1, 1913 Value 5 Shares at $2,441.44 per Share | $12,207.20 | |
| June 30, 1919 Value 35 Shares at $2,725.84 per Share | 95,404.40 | 107,611.60 |
| Capital Gain Reported | $372,388.40 |
*1081 It was stipulated by the parties that the fair market value of the stock of the company on March 1, 1913, was*856 $2,441.44 per share and on July 1, 1919, was $2,725.84 per share. The value of the stock on the dates aforesaid was determined by giving effect to the value of intangible assets, under the provisions of A.R.M. 34, not appearing on the books of the company. The stock of the company has at all times been closely held, and there were no sales of it on the open market.
At a meeting of the board of directors of the company held on October 2, 1929, a dividend in the amount of $200,000 was declared, to be paid in cash on January 2, 1930, and was so paid.
The surplus of the company to a large extent was invested in safe securities and time certificates of deposit with reputable banks and at all times had a readily realizable value. Up until the fiscal year ended June 30, 1925, the certificates of time deposit were carried on the books of the company as cash, but beginning with the fiscal year ended June 30, 1926, they were treated as "accounts receivable" and included under such a title on the books of the company. The total amounts of certificates of time deposit for the years ended on the dates named were as follows: June 30, 1926, $564,651.95; June 30, 1927, $614,745.10; June 30, 1928, $831,440.06; *857 June 30, 1929, $250,000; June 30, 1930, $475,000; and June 30, 1931, $225,000.
The company paid officers' salaries in the aggregate amount of $30,300 for the fiscal years ended June 30, 1923, to June 30, 1926, inclusive ($15,000 each to Elwood and Charles McGuire, and $300 to Esther McGuire annually); and for the fiscal years ended June 30, 1927, to June 30, 1930, inclusive, in the aggregate amount of $60,500 per annum ($30,000 each to Elwood and Charles McGuire, and $500 to Esther McGuire annually).
After the retirement of the 80 shares of stock of the company, as aforesaid, the stock was held as follows:
| Elwood W. McGuire | 54 shares |
| Charles A. McGuire | 45 shares |
| Esther McGuire | 1 share |
The value of $12,000 per share to be paid for the 80 shares of stock was based upon actual book figures of the value of assets, without the addition of the value of good will, which did not appear as an asset on the books of the company.
On January 11, 1930, the company had on hand earnings or profits accumulated after February 28, 1913, in excess of the amount of $960,000 paid to the petitioners for the 80 shares of its capital stock as aforesaid.
During the year 1930*858 Elwood W. McGuire sold for $304,282 certain of the Liberty bonds of a facr or par value of $294,000 which *1082 he had received from the company in that year. The fair market value of these Liberty bonds at the time of receipt by him was $296,848.13. He reported in his 1930 Federal income tax return a profit of $10,282 from this sale of bonds, representing the difference between the sale price and face or par value of $294,000. The respondent computed a profit of $7,433.87 on the sale, representing the difference between the sale price and the fair market value at the time of receipt, and reduced the profit reported on the return by $2,848.13, as disclosed in the notice of deficiency.
Elwood W. McGuire reported taxable interest on Liberty bonds received in 1930 in the amount of $26,674. The respondent, in determining the fair market value of the Liberty bonds received from the company in 1930 in the amount of $490,316.67, added $5,666.67 for the interest accrued to the date the bonds were received and reduced the interest reported by that amount, and determined the taxable interest on Liberty bonds to be $21,007.33, as disclosed in the notice of deficiency.
In agreeing*859 to the facts stipulated herein, the respondent did not waive his contention that the payment of the sums or properties therein mentioned was essentially equivalent to the distribution of a taxable dividend.
OPINION.
SEAWELL: "The petitioners contend that the gain resulting to them from the sale by each of the 40 shares of stock to Dille and McGuire Manufacturing Company is the difference between the amount received and the cost basis, as provided by Section 113 of the Revenue Act of 1928; and the profit realized is taxable at the rate of 12 1/2% (capital gain tax)."
The respondent insists that what the petitioners received as a result of the sale of said stock, redeemed and canceled, was "essentially equivalent to the distribution of a taxable dividend", and that the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, should be treated as a taxable dividend. The correct determination of the issue thus presented depends upon whether or not the transactions involving the sales of stock to the company were in point of time and manner such as to make the distribution, *860 redemption, and cancellation, in whole or in part, essentially equivalent to the distribution of a taxable dividend, within the meaning of section 115(g) of the Revenue Act of 1928, which provides:
If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially *1083 equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.
The respondent's determination being against petitioners' contention and presumptively correct, the burden of proof, of course, is on the petitioners to show that the facts do not bring the transactions within the purview of the provisions of the section quoted. Cf. *861 Shelby H. Curlee, Trustee,28 B.T.A. 773">28 B.T.A. 773; affd., 76 Fed.(2d) 472; Leopold Adler,30 B.TA. 897; George Hyman,28 B.T.A. 1231">28 B.T.A. 1231; affd., 71 Fed.(2d) 342; certiorari denied, 293 U.S. 570">293 U.S. 570.
The various sections of the Revenue Act of 1928 relied on by petitioners to sustain their insistence, for the sake of brevity, are not herein quoted, but merely cited. Briefly stated, petitioners contend that the result of the purchase of 40 shares from each of them was a distribution in partial liquidation in complete redemption and cancellation of part of the company's stock within the meaning of section 115(c) and (h) of the Revenue Act of 1928 and that the amount of gain to them as distributees, resulting from the exchange of their stock for the securities which they received, should be determined under sections 111 and 112 of the Act of 1928 and upon the basis provided in section 113 (sec. 113(a)(2) and (b)(2)), and that such profit may properly be reported as capital net gain (sec. 101), subject to the tax upon capital net gains (sec. 101(a)), or, in the alternative, the transactions were in fact purchases*862 by the corporation from them of its own stock and the amounts received were in payment of the purchase price thereof.
The purpose and principles underlying the sections of the Revenue Act of 1928 above mentioned and corresponding provisions of prior revenue acts and the interpretations placed thereon are set forth in numerous decided cases, some of which are Pearl B. Brown, Executrix,26 B.T.A. 901">26 B.T.A. 901; affd., 69 Fed.(2d) 602; certiorari denied, 293 U.S. 579">293 U.S. 579; James D. Robinson,27 B.T.A. 1018">27 B.T.A. 1018; affd., 69 Fed.(2d) 972; Harry A. Koch,26 B.T.A. 1025">26 B.T.A. 1025; Annie Watts Hill,27 B.T.A. 73">27 B.T.A. 73; affd., 66 Fed.(2d) 45; Henry B. Babson,27 B.T.A. 859">27 B.T.A. 859; affd., 70 Fed.(2d) 304; certiorari denied, 293 U.S. 571">293 U.S. 571; James A. Connelly,30 B.T.A. 331">30 B.T.A. 331; Alfred E. Fuhlage,32 B.T.A. 222">32 B.T.A. 222; Girard Trust Co. et al., Administrators,32 B.T.A. 926">32 B.T.A. 926; Hyman v. Helvering, supra; *863 Commissioner v. Cordingley, 78 Fed.(2d) 118 (C.C.A., 1st Cir.); Commissioner v. Quackenbos, 78 Fed.(2d) 156 (C.C.A., 2d Cir.); David J. Champion,27 B.T.A. 1312">27 B.T.A. 1312; affd., 78 Fed.(2d) 513 (C.C.A., 6th Cir.).
*1084 From a consideration of the foregoing cases and others therein cited, it is evident that whether certain transactions fall within or without the provisions of section 115(g), supra, must be determined upon their particular facts and circumstances. In the instant proceedings the record shows that when the company was incorporated it had an authorized capital of only $9,000, which was never increased but in 1930 was reduced to $5,000, the par value of the stock all the time being $50 per share.
During the taxable year involved and for some years prior thereto the petitioners owned all of the stock of the company except one share owned by the wife of one petitioner and mother of the other petitioner. The evidence shows that the authorized capital of $9,000 was never adequate for carrying on the business of the company and that the earnings or profits from the business were very largely utilized*864 in operating and developing the business of the company, which, as shown by our findings of fact, was in its latter years very successful, very substantial dividends being declared and paid out of the large earnings or profits of the business, a portion of which earnings, however, for several years prior to 1930 were, according to the testimony of the company's president, conserved with a view to the establishment of a manufacturing plant in one of the New England States, though the record fails to show that any official resolution to effect such a purpose was ever taken by the stockholders or directors of the company. Such failure, however, in our opinion, in view of facts shown in the record, does not warrant the conclusion that the action of the company in conserving its earnings for several years as stated was availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being distributed as dividends. In other words, in the light of the record, we think the company did conserve its earnings with the intent and purpose on the part of the petitioners, practically sole*865 owners of the company, to establish a manufacturing plant in the eastern states, and abandoned the idea only after the depression struck in 1929 and it appeared unwise and inadvisable to do so. Notwithstanding such fact, it does not, in our opinion, necessarily follow that, when fairly viewed, the transactions in question fail to make the distribution to the petitioners, as described, "essentially equivalent to the distribution of a taxable dividend" falling within and governed by the provisions of section 115(g) of the Revenue Act of 1928, as contended by the petitioners.
It has been held, and we think properly, that the contention that payments made by a corporation in exchange for its stock are taxable as dividends, except when made in pursuance of a plan for *1085 complete liquidation of the corporation, can not be sustained. See Commissioner v. Brown, supra; Commissioner v. Babson, supra; Commissioner v. Cordingley, supra.
The statute clearly contemplates that stock dividends may be issued and redeemed; it makes explicit provision as to the taxation of sums paid in such redemption; it recognizes that the capitalization of earnings*866 by means of stock dividends is not a distribution of earnings and is not taxable. (Sec. 115(f).) "The statute does not provide that every cash redemption of shares shall be treated per se as a dividend but only those which because of some circumstance of time and manner are in fact the essential equivalent of a dividend." Commissioner v. Brown, supra. See also Hyman v. Helvering, supra.
The record shows that the authorized capital stock of $9,000 was exceedingly small for the company, which was doing annually over a million dollar business. It further shows that a large surplus had been accumulated from earnings since February 28, 1913, partially, if not solely, conserved with a view to the establishment of a plant in an eastern state, but that in the latter part of 1929 the petitioners and the company abandoned such purpose and reached the conclusion that the large surplus should be distributed for petitioners' use. There is no evidence indicating there was ever any idea of ceasing operations, all the evidence indicating the purpose to carry on the business.
On January 11, 1930, a stockholders' meeting was held, at which the chairman called attention to*867 the fact that the charter of the corporation would expire December 11, 1930, and it would be necessary to reorganize the corporation, and that, so anticipating, a thorough and complete audit of the books of the company had been made. At that meeting resolutions were adopted, set out or described in our findings of fact, providing for the purchase by the company of 40 shares of its capital stock from each of the petitioners at its book value, such shares to be held "as the property of and in the treasury of the Company until the capital stock of the Company can be reduced to one hundred shares of the par value of fifty dollars each and that the officers take such action as may be necessary to effect such purchase." At the same meeting the capital stock was reduced to $5,000, subject to the approval of the Secretary of the State of Indiana (which was promptly given) and immediately after the adjournment of the stockholders' meeting the directors, the petitioners herein, met and ordered that $12,000 per share be paid for 40 shares of the company's stock to be purchased from each of the petitioners. Thereafter, shares of stock were purchased from petitioners as contemplated and paid*868 for and certain old certificates surrendered and canceled as set forth in the findings of fact, the *1086 capital of the company being reduced, as stated, from $9,000 to $5,000, and the company was granted a charter for perpetual existence. The reduction in capital stock is not shown to have been necessary in order to obtain, under the Indiana General Corporation Act, a charter of perpetual existence. It was not necessary to reduce the capital in order to effect a distribution of the accumulated surplus.
The reduction in the capitalization of the company was not to bring the capitalization to a figure more nearly the approximate value of the assets or to create a surplus. The company did not contract its business. There was no shrinkage in the business comparable to the reduction in capital. (Cf. T. Pierre Champion,27 B.T.A. 1312">27 B.T.A. 1312.) There was no impairment of the company's capital. No intention of winding up its affairs. The fact that the petitioners elected to report certain gain or profit from the transactions in question and be taxed thereon at capital gain rates is not determinative. Whether a corporation is in liquidation is a question of fact. *869 (Cf. Fred T. Wood,27 B.T.A. 162">27 B.T.A. 162, 167, and cases therein cited.) If the earned surplus, accumulated after February 28, 1913, had been distributed direct to the stockholders of the company in the taxable year in issue, it would, undoubtedly, have been taxable as an ordinary dividend (see 115(a), Revenue Act of 1928).
Did not what was done by the company, which was controlled and practically owned absolutely by the two petitioners, produce the same result as would have a distribution by the company direct to its stockholders of its surplus in an amount equal in value to what they received under the method pursued?
The distribution made to the stockholders, in our opinion and we so hold, was made at such time, under such circumstances, and in such manner as to make the transaction with respect to the 80 shares of the company's stock essentially equivalent to the distribution of a taxable dividend. In reaching such determination, it is not necessary that we should find or conclude that the original intent in conserving earnings of the company was not to establish another plant, or was a scheme or artifice to evade payment of the proper tax.
Whatever may have*870 been the intent or purpose of the company in accumulating and conserving during several years the earned surplus shown to exist in a large amount in 1930, the time and manner of its disposition; the reduction of the company's already small capital of $9,000 to $5,000; and the purchase from the petitioners of 80 of its shares at $12,000 per share (par value being $50 per share), in connection with other facts and circumstances disclosed by the record, in our opinion, bring the case within the intent of section 115(g), supra, whether or not there was originally any attempt or purpose *1087 on the part of the company or the petitioners to evade the payment of any tax.
We have cited herein numerous decisions, some holding that the distributions and cancellations described were essentially equivalent to distributions of taxable dividends within the meaning of section 115(g), supra, and others that they were distributions in complete or partial liquidation of corporations and were within the intent of section 115(c) and (h), supra, each as heretofore indicated depending on its particular facts and circumstances.
We think this case is distinguishable from those falling*871 under section 115(c) and (h), supra, and properly falls under section 115(g), supra, and should be dealt with accordingly, being controlled by the principles enunciated and applied in Hyman v. Helvering, supra, and in other cases cited herein.
What the Finance Committee of the Senate, having under consideration the Internal Revenue Bill of 1926, stated in its report with reference to section 201(g) of the Revenue Act of 1926 throws light upon the intent and purpose of Congress in reenacting identically the same section as 115(g) in the Revenue Act of 1928. In that report it was stated as follows:
Section 201(g): It has been contended that under existing law a corporation, especially one which has only a few stockholders, might, without resorting to the device of a stock dividend, be able to make a distribution to its stockholders which would have the same effect as a taxable dividend. For example: Assume that two men hold practically all the stock in a corporation, for which each had paid $50,000 in cash, and the corporation had accumulated a surplus of $50,000 above its cash capital. It is claimed that under existing law the corporation could buy from the stockholders, *872 for cash, onehalf of the stock held by them and cancel it without making the stockholders subject to any tax. Yet this action, in all essentials, would be the equivalent of a distribution through cash dividends of the earned surplus. The subdivision as rewritten by the House bill is intended to make clear that such a transaction is taxable and the committee approves the provision, which obviously does not apply in cases of complete liquidation of all the stocks of the corporation.
We think it immaterial that the stockholder owning only one share could not participate in the distribution or dividend. Northern Trust Co., Trustee,20 B.T.A. 866">20 B.T.A. 866; affd., 54 Fed.(2d) 289; certiorari denied, 285 U.S. 558">285 U.S. 558, and cases therein cited; Joseph Goodnow & Co.,5 B.T.A. 1154">5 B.T.A. 1154; F. G. Lamb,14 B.T.A. 814">14 B.T.A. 814. The basis of redemption was uniform to those participating. (Cf. James D. Robinson v. Commissioner, supra. ) See Leopold Adler, supra;Shelby H. Curlee, supra.
In our opinion, and we so hold, the payments made in 1930 in securities owned by the company, to the petitioners represent, *873 in the circumstances of the instant case, taxable income whether considered *1088 distributed as a dividend or as a consideration for the acquisition of the 80 shares of stock. Cf. Peabody v. Eisner,247 U.S. 347">247 U.S. 347; United States v. Phellis,257 U.S. 156">257 U.S. 156; Rockefeller v. United States,257 U.S. 176">257 U.S. 176; United States v. Fuller, 42 Fed.(2d) 471; Security First National Bank of Los Angeles, Executor,28 B.T.A. 289">28 B.T.A. 289, 311; George F. Baker, Jr., Executor,28 B.T.A. 704">28 B.T.A. 704.
We are further of the opinion and hold that the securities received by Elwood W. McGuire were properly valued by the respondent at their fair market value at the time of receipt rather than at par or face value as reported by Elwood W. McGuire on his tax return. Arthur Curtiss James,13 B.T.A. 764">13 B.T.A. 764; affd., 49 Fed.(2d) 707; United States v. Fuller, supra; art. 627, Regulations 74.
We are further of the opinion and hold that the respondent did not err when, in determining the fair market value of Liberty bonds received by Elwood W. McGuire in 1930 from*874 the company in the amount of $490,316.67, he added the accrued interest to date the bonds were received, or $5,666.67, and reduced the interest, $26,674, reported by McGuire, by the amount of accrued interest and determined the taxable interest on Liberty bonds to be $21,007.33.
We are, therefore, of the opinion and hold that the respondent's determination in each of the cases herein is correct and is accordingly approved.
Reviewed by the Board.
Decision in each docket will be entered for respondent.
MATTHEWS dissents.