1932 BTA LEXIS 1134">*1134 1. The redemption in 1926 of preferred stock received by the petitioner in 1923 as a stock dividend held not to have been made under circumstances essentially equivalent to the distribution of a taxable dividend so as to make the amount distributed in redemption of the stock taxable as a dividend under the provisions of section 201(g) of the Revenue Act of 1926.
2. The amount of gain realized on redemption in 1926 of preferred stock issued to petitioner as a stock dividend in 1923 held taxable as a capital gain.
27 B.T.A. 44">*44 This proceeding is for the redetermination of a deficiency in income tax of $5,020.41 for 1926. The only issue involved is whether an amount of $22,365 received by the petitioner during the taxable year upon redemption of 213 shares of corporate preferred stock issued to him in 1923 as a stock dividend is taxable as an ordinary cash dividend, or as a capital gain.
FINDINGS OF FACT.
The petitioner is a resident of Birmingham, Alabama. Subsequent to March 1, 1913, and prior to 1923 he purchased 213 shares of the common1932 BTA LEXIS 1134">*1135 capital stock of the Consolidated Naval Stores Company, a Florida corporation, at prices ranging from $165 to $240 per share.
At the annual meeting of the stockholders of the Consolidated Naval Stores Company on January 17, 1923, a committee was appointed to investigate the matter of the corporation declaring a stock dividend. Under date of March 9, 1923, the committee made its report, which in part was as follows:
To the Stockholders of Consolidated Naval Stores Company:
At your annual meeting of January 17, 1923, a Committee was appointed to look into the matter of declaring a stock dividend and report thereon to you. Your Committee has carefully investigated the facts and desires to submit this report.
The Company has for 20 years been acquiring large areas of timbered lands with a view of disposing thereof when the time therefor seemed opportune. Accordingly the Florida Industrial Company was organized in 1920 with a paid up capital stock of $2,500,000 held in equal parts by the Gillican-Chipley Company, Inc. of New Orleans, and the Consolidated Land Company. It purchased from the Consolidated Land Company 1,125,000 acres of land and timber for $12,120,000, or about1932 BTA LEXIS 1134">*1136 $11 per acre for the lands in fee, and agreed to pay 6% interest thereon from January 1, 1924. It has until January 1, 1941 within 27 B.T.A. 44">*45 which to turpentine and cut the timber. By December 15 of each year it must pay to the Consolidated Land Company the sum of $1,500 for each crop of 10,000 cups installed on said timber during such year. Following the turpentining, the timber is to be cut and removed. Upon such removal the Florida Industrial Company must make a further payment to the Consolidated Land Company, which, when added to said $1,500 per crop theretofore paid, aggregates said $11 per acre.
The Florida Industrial Company operated 150 crops in 1922. 150 additional crops are now being installed. It plans to increase the number to a total of at least 600 crops, which, if maintained will complete the naval stores operations in from 15 to 18 years. Inasmuch as the Consolidated Land Company owns one-half of the capital stock of the Florida Industrial Company, the former will be entitled to one-half of whatever net profits may be realized by the latter from its operations.
| The Consolidated Naval Stores Company and the Consolidated Land Company, (whose entire capital stock is owned by Consolidated Naval Stores Company), carry their assets on their books at cost plus carrying charges. According to their combined balance sheet as of December 31, 1922, their total assets (excluding the amounts due under said contract with the Florida Industrial Company) were | $12,279,514.39 |
| Their debts on that date (including the $3,000,000 bond issue) were | 4,964,008.19 |
| Leaving a net worth of | 7,315,506.20 |
1932 BTA LEXIS 1134">*1137 or about $297 per share for the 24,753 shares of capital stock of Consolidated Naval Stores Company now outstanding.
When in the course of years the Florida Industrial Company shall have fully carried out its said contract there will be added to these assets an additional profit of $8,049,949.27, or about $325 per share, making a total value of $622 per share. The Consolidated Companies also own other valuable lands (not covered by said contract with the Florida Industrial Company) from which they hope to realize a profit of more than $1,000,000.
However, the carrying charges and expenditures of the Consolidated Companies are very heavy. The taxes on their properties are now about $250,000 per year - an amount equal to over 10% on the capital stock. Also the interest on their debt of $4,964,008.19 is about $350,000 per year. Moreover, in carrying out the established policy of converting their assets into cash, the Consolidated Companies will have to make large additional expenditures until the operations are of sufficient magnitude to become self sustaining.
For these reasons, it is manifest that the Consolidated Naval Stores Company will not be in a position to pay1932 BTA LEXIS 1134">*1138 any cash dividends for the next year or two. However, inasmuch as the Company has an earned surplus which considerably exceeds the $2,475,300 par value of common stock now outstanding, your Committee suggests that the Company may, if the stockholders approve, declare a 100% stock dividend, consisting of $2,475,300 par value of 7% cumulative preferred stock. Although the Company may not be able to pay a dividend on this preferred stock for the next year or two, the dividend thereon will be cumulative from July 1, 1923, so that the Company will be obliged to pay a dividend on the preferred stock (when declared by the Board of Directors) at the rate of 7% per annum from July 1, 1923, before any dividends can be declared or paid on the Company's common stock.
27 B.T.A. 44">*46 There is to be said in favor of the declaration of such preferred stock dividend, the following:
(1) Such declaration would be in harmony with the policy adopted in recent months by several hundred other corporations similarly situated. We believe this policy sound.
(2) The issuance of $2,475,300 par value of preferred stock in addition to the like amount of common stock now outstanding brings the capitalization1932 BTA LEXIS 1134">*1139 of the Company to a figure which more nearly approximates the value of its assets.
(3) Each stockholder will be entitled to his pro rata share of the preferred stock. If, for instance, he owns 100 shares of common stock at the time the dividend of preferred stock is declared, he will hold, after such declaration, said 100 shares of common stock and also 100 shares of preferred stock, without any additional cost to him. The stockholders may derive advantages both from having the larger number of shares, and also from having two classes of stock instead of only one.
On the same day the report was submitted the directors of the Consolidated Naval Stores Company called a special meeting of the stockholders to be held on April 10, 1923. The purpose of the meeting as stated in the notice to the stockholders was:
* * * to consider and vote upon the question of amending the Company's charter so as to provide an authorized issue of $2,500,000 par value of preferred stock and also, if thus amended, to consider and vote upon the question of recommending and requesting that the Board of Directors of the Company distribute $2,475,300 par value of such preferred stock pro rata among the1932 BTA LEXIS 1134">*1140 stockholders of the company as a stock dividend; also to consider and vote upon the question of amending * * * the Company's by-laws. $2,475,300 par value of the company's present authorized issue of common stock is now outstanding, and it is not proposed that this amount shall be increased. $24,700 par value of each class of stock will remain unissued.
At the special meeting of the stockholders held on April 10, 1923, a resolution was adopted providing for amendment of the charter so as to authorize an issue of $2,500,000 par value of 7 per cent preferred stock which should have certain preferences and be subject to certain limitations. A resolution was also adopted requesting the directors to distribute as a stock dividend, as soon as the charter was amended, $2,475,000 par value of the preferred stock, so that each stockholder of the corporation would own the same number of shares of common stock as he owned at the time of such declaration and would also own an equal number of shares of preferred.
At a meeting held on May 12, 1923, the directors of the Consolidated Naval Stores Company adopted the following resolution:
BE IT RESOLVED that in accordance with a resolution1932 BTA LEXIS 1134">*1141 adopted by the stockholders of this corporation at a special meeting held on April 10th, 1923, and by authority of the power contained in an amendment of its Charter approved May 11th, 1923, by the Governor of the State of Florida, a stock dividend of one hundred per cent on the issued and outstanding common stock of this corporation be and the same is hereby declared out of its undivided profits now 27 B.T.A. 44">*47 amounting to more than two million four hundred seventy five thousand three hundred dollars, said stock dividend to be distributed pro rata among the common stockholders of record on May 15th, 1923, payable only in seven per cent cumulative preferred stock of this corporation of the par value of one hundred dollars per share and not otherwise, which said preferred stock so to be distributed as a stock dividend shall have and enjoy the preferences and be subject to the limitations following:
(a) In each quarter year after and commencing with July 1st, 1923 the preferred stock shall be entitled to a dividend at the rate of seven (7) per cent per annum on the par value thereof, when and as the Board of Directors of the corporation shall declare the same. Such dividend shall1932 BTA LEXIS 1134">*1142 be cumulative and shall not bear interest. No dividend on the common stock of the corporation shall be declared or paid until all quarterly installments of dividends on the preferred stock (including accumulated and unpaid dividends, if any) shall have been paid. So long as any of the preferred stock shall be outstanding, the dividends on all of the common stock shall in no event exceed an average of more than $175,000, per annum, computed from July 1st, 1923.
(b) The dividends on the preferred stock shall in no event exceed seven (7) per cent per annum on the par value thereof, computed from July 1st, 1923.
(c) In case of the dissolution of the corporation or the winding up of its business and affairs, whether voluntary or involuntary, the holders of the preferred stock shall be entitled to be paid in full the par value of their shares, plus an amount in cash equal to interest at the rate of seven (7) per cent per annum thereon, computed from July 1st, 1923 (less the dividends, if any, theretofore paid on said preferred stock) before any sum shall be paid to the holders of the common stock. After such payment to the holders of the preferred stock, the remaining assets and1932 BTA LEXIS 1134">*1143 funds, if any, shall be paid pro rata to the holders of the common stock.
(d) The preferred stock shall be redeemable, on call of the Board of Directors, on any quarterly dividend date after July 1st, 1923, at one hundred and five (105) per cent of its par value, plus accumulated and unpaid dividends thereon, if any, computed to the date of redemption. Published notice of such proposed redemption shall be given for thirty (30) days prior thereto in some daily newspaper published in JacksonvilleFlorida. The preferred stock shall be thus redeemable in whole or in part; and if in part, then by lot.
(e) The preferred stock shall not be entitled to receive notice of, attend or vote at any meeting of the stockholders of the corporation except when and so long as the accumulated and unpaid dividends thereon amount to as much as fourteen (14) per cent of the total par value of the preferred stock then outstanding.
And that two million four hundred and seventy-five thousand three hundred dollars of said undivided profits, the equivalent amount of and represented by the par value of the said preferred stock dividend, be transferred from this corporation's undivided profits account1932 BTA LEXIS 1134">*1144 to its capital account.
In order to receive certificates for common stock in conformity with the charter of the corporation as amended, the petitioner surrendered his certificates for 213 shares of the common stock of the corporation and received new certificates for the same number of shares of the company's common stock. Pursuant to the resolution adopted by the directors, he also received as a stock dividend, 213 shares of the newly created preferred stock of the company. Immediately 27 B.T.A. 44">*48 after the issuance of the preferred stock in 1923 the common stock of the company sold at $95 per share and the preferred at $80 per share. The petitioner has continued to hold his 213 shares of common stock.
During the period between January 1, 1913, and December 31, 1922, the Consolidated Naval Stores Company paid cash dividends on its stock of the following percentages: 12 per cent in 1913, 6 per cent in 1914, 4 per cent in 1916, 10 per cent in 1917, 6 per cent in 1919, and 12 per cent in 1920. With the exception of certain dividends paid on its preferred stock and hereinafter referred to, no cash dividends were paid by the company on its stock during the period between 19201932 BTA LEXIS 1134">*1145 and 1926.
On December 31, 1922, the Consolidated Naval Stores Company had common stock of a par value of $2,475,300 outstanding. Its surplus and undivided profits on that date amounted to $3,768,528.79. On the same date it had cash in the amount of $529,785.92. Its bills and accounts receivable, other than intercompany accounts with subsidiaries, amounted at that time to $3,621,418.52, and bills and accounts payable, other than those payable to subsidiaries, amounted to $1,565,655.28. The surplus of $3,768,528.79 was reduced to $1,293,228.79 by the issuance of the preferred stock dividend of $2,475,300.
The net earnings of the Consolidated Naval Stores Company for 1923, 1924 and 1925 were $240,599.40, $248,601.96 and $624,001.80, respectively, or a total of $1,113,203.16. Additional income received by the company during these years consisted of dividends of affiliated companies in the aggregate amount of $1,055,470.52, all of which was received in 1925 except $209,251.69 which was received or declared in 1924. The company's surplus and undivided profits at the close of 1923 were $1,533,828.19, at the close of 1924 were $1,991,681.84, and at the close of 1925 were $2,704,349.20. 1932 BTA LEXIS 1134">*1146 The company had cash amounting to $223,920.71 at the close of 1923, $238,718.32 at the close of 1924, and $2,192,919.16 at the close of 1925.
No dividend was paid on the preferred stock of the Consolidated Naval Stores Company prior to April 10, 1925. On that date and on July 10, 1925, and October 10, 1925, dividends of 1 3/4 per cent each, or a total of 5 1/4 per cent, were paid. At a meeting of the directors of the company on December 16, 1925, two further dividends on the preferred stock were authorized, one amounting to 10 1/2 per cent and the other to 1 3/4 per cent. The dividends previously paid and those authorized, totaling 17 1/2 per cent, represented the full payment on the stock for two and one-half years from July 1, 1923.
The minutes of the meeting of the board of directors of the Consolidated Naval Stores Company held on December 16, 1925, are in part as follows:
27 B.T.A. 44">*49 Mr. Kelly stated that the object of the meeting was to declare a dividend of 10 1/2%, which takes up all accumulated dividends in the Preferred stock from April 1, 1924 to October 1, 1925, and another dividend of $1.75 per share from October 1, 1925 to December 31, 1925, and to adopt a1932 BTA LEXIS 1134">*1147 resolution calling for redemption of all of the Preferred stock of the Company on April 1st, 1926, and also to authorize and direct the Company to purchase between January 1st and April 1st, 1926, any Preferred stock which may be had at the callable price. Captain Hillman thereupon offered the following resolution, moving its adoption. This was seconded by Mr. Gaines and unanimously carried, to-wit:
RESOLVED that a dividend of 10 1/2% being the accumulated dividends on the Preferred stock of the Company from April 1, 1924 to October 1, 1925, be declared, payable on December 21, 1925 to stockholders of record as of this date.
RESOLVED, FURTHER, That a quarterly dividend of 1 3/4% covering the period from October 1st to December 31st, 1925, be declared on the Preferred stock of the Company, payable on January 2, 1926 to stockholders of record on December 26th, 1925.
Mr. Covington offered the following resolution, moving its adoption. This was seconded by Captain Hillman and unanimously carried, to-wit:
RESOLVED that all of the Preferred stock of this corporation be redeemed and it is hereby called for redemption on and as of April 1, 1926, at the price of 105 per cent. of1932 BTA LEXIS 1134">*1148 its par value plus accumulated and unpaid dividends on the par value thereof, computed from January 1, 1926 to the date of redemption: That is, to and including March 31, 1926; and that notice of such proposed redemption be given for thirty days prior to April 1, 1926 in the Florida Times-Union, a daily newspaper published in the City of Jacksonville, Florida.
BE IT FURTHER RESOLVED, that the President or any Vice-President of this Company be and is hereby authorized and empowered to publish on January 2, 1926 and also subsequently for the period of thirty consecutive days prior to the date of such proposed redemption, notice of the call for payment and redemption of all the Preferred stock of this corporation, pursuant to the Charter, By-laws, Preferred stock certificates and these resolutions, at the price aforesaid; and that in addition thereto such President or Vice-President, by mail, notify all Preferred stockholders of record on January 2, 1926, of said call for payment and redemption of all of the Preferred stock of this Company outstanding on April 1, 1926, at the price aforesaid.
BE IT FURTHER RESOLVED, that the President, or any Vice-President and Secretary or any1932 BTA LEXIS 1134">*1149 assistant Secretary of this Company, are hereby authorized to execute all instruments in writing and do all things necessary or advisable in their opinion in order to effectuate the foregoing resolutions and to pay for and redeem all of the Preferred stock of this Company outstanding on April 1, 1926.
BE IT FURTHER RESOLVED, that all certificates of Preferred stock redeemed under these resolutions be cancelled and retired.
BE IT FURTHER RESOLVED, that this Company purchase at any time after January 2, 1926, and prior to April 1, 1926, from the Preferred stockholders of this Company, all or any part of their Preferred stock holdings in this Company outstanding at any time between said last mentioned dates, at the price of $100.00 per share, being the par value thereof, plus premium of 5% on said par value and plus interest on the par value of such Preferred stock from January 1, 1926, at the rate of 7% per annum, 27 B.T.A. 44">*50 to the date of purchase of said stock by the Company; but in no event shall any such purchase be made at a date later than March 31, 1926, and the President or any Vice-President of this Company is hereby authorized and directed to notify, by mail, all of the1932 BTA LEXIS 1134">*1150 preferred stockholders of this Company of record on January 2, 1926, of the effect of these resolutions and the willingness of this Company to purchase said Preferred stock at the price and on terms aforesaid at any time between January 2nd and March 31st, 1926.
BE IT FURTHER RESOLVED that all Preferred stock so purchased by this Company, pursuant to these resolutions, be cancelled and retired as fast as purchased and received.
As information, Mr. Kelly advised that all of the outstanding bonds of the Companies had been redeemed on December 15th and satisfaction of the Bond Mortgage executed.
At the annual meeting of the stockholders of the Consolidated Naval Stores Company held on March 3, 1926, the president of the company made an address which reads as follows:
On behalf of the Officers and Directors of the Company I wish to submit herewith the twenty-third annual report of its operations.
The unsatisfactory conditions which prevailed in the Naval Stores industry in 1924 were succeeded by a period of profitable prices which were maintained during 1925. It is also gratifying to report that the enormous activity in the land market last year resulted in very large sale1932 BTA LEXIS 1134">*1151 by the Company at unprecedented prices for the same classes of property in this State.
Attached to and forming a part of this report, are the financial statements which show that the current net earnings of the Company and the subsidiaries wholly owned by it, for the year 1925, were $1,492,773.30, after providing for income taxes and a premium of five per cent. on the preferred stock to be paid on or before April 1st, 1926, when it is redeemed.
It is customary to refer to the item of Surplus and Undivided Profits, but before giving the figures, I may state that on account of the large volume of sales by this Company and its subsidiaries, on the installment or deferred payment basis, it was necessary to set up the profits and deferred credit to Surplus accordingly. Such deferred amounts, however, will not become available until the installment payments on land sales have been made and the profits therefrom actually realized.
We have, therefore, classified the Surplus and Undivided Profits of this Company and your participation in the Surplus and Undivided Profits of all subsidiary companies, under two headings, namely: Current and Deferred, and the amounts are as follows: 1932 BTA LEXIS 1134">*1152 -
| Current | $5,031,705.71 |
| Deferred | 5,279,002.58 |
The Consolidated Land Company's operations for the year show net current profits of $1,164,427.94 and deferred profits of $3,343,270.54. Land sales for the year were 364,837.97 acres.
The Florida Industrial Company, in which your Company owns a half interest, likewise enjoyed a prosperous year, the result of which shows its deferred profits are in excess of three million dollars.
In the course of the year your Company redeemed and paid in full all of its outstanding bonds, in the principal sum of $2,794,000, although the serial maturities thereof extended over a further period of twelve years.
27 B.T.A. 44">*51 Your Directors have likewise authorized the call for redemption on April 1st, 1926, of all the Preferred stock of the Company, amounting to $2,475,300.00, and notice to this effect was mailed to all stockholders on January 2nd, and at the same time we gave them the opportunity of surrendering their stock before April 1st and receiving payment therefor at the redemption rate. I may add that more than half of the stockholders have already availed themselves of this privilege.
Following the policy established1932 BTA LEXIS 1134">*1153 by the Company of converting its properties into cash or its equivalent, we sold in addition to lands and timber during 1925, the Consolidated Building and the Riverside property of the Consolidated Grocery Company; also the Cattle Ranch, which enables us to accomplish the liquidation of the Consolidated Grocery Company and the Kissimmee Island Cattle Company.
At a meeting of your Directors, today, a dividend of ten per cent. (10%) was declared, payable on April 15th to the common stockholders of record on April 10th, 1926.
The entire issue of the preferred stock of the Consolidated Naval Stores Company was redeemed and retired in 1926 as contemplated by the resolutions adopted by the board of directors on December 16, 1925. At the date of the redemption of the preferred stock the petitioner still owned the 213 shares which had been issued to him as a stock dividend. Upon surrender of his 213 shares of the preferred stock for retirement the petitioner received from the company the amount of $22,365, or $105 per share.
After the redemption and retirement of its preferred stock in 1926 the Consolidated Naval Stores Company continued throughout the remainder of that year and1932 BTA LEXIS 1134">*1154 during 1927 to conduct an extensive business. The company is still in existence and regularly conducting business.
On March 12, 1927, the following letter was received in the office of the internal revenue agent in charge, Jacksonville, Fla.:
CONSOLIDATED NAVAL STORES COMPANY
JACKSONVILLE, FLA.
March 11, 1927.
MR. C. W. HERRICK, Internal Revenue Agent,Jacksonville, Florida.
Attention Mr. M. C. Eillis
Dear Sir: As requested in your letter of March 7, 1927, we beg to hand you herewith list of Stockholders who owned and redeemed in 1926 Preferred Stock of this Company, which was issued as a Stock dividend in 1923. The names on this list are those of which the redemption of stock dividend may be considered as equivalent to a cash dividend in 1926.
Trusting that the enclosed will give you the information desired, we are,
Very truly yours,
CONSOLIDATED NAVAL STORES COMPANY,
(Signed) G. C. CHAPPELL, Secretary.
GCC:R
P.S. You will note this is the same information that we are forwarding to the Commissioner of Internal Revenue, Sorting Section, Washington, D.C.
27 B.T.A. 44">*52 The list attached to the foregoing letter was captioned "List of1932 BTA LEXIS 1134">*1155 Dividend Payments" and contained the following statements on its first page:
I swear (or affirm) that the following is a true and complete report of all payments of redemption of stock dividends made to shareholders receiving amount that may be considered as cash dividends in 1926 as stated below.
[Signed] G. C. CHAPPELL,
Secretary.
* * *
Preferred Stock issued as a Stock dividend May 15, 1923, and redeemed in 1926, to Common Stockholders of record on date redeemed, who still own the corresponding shares of Common stock on which they received the Preferred stock as a stock dividend according to our records, which may not, however, be in accordance with the facts. (Redeemed at par value of $100.00 per share plus premium of $5.00 per share.)
The list attached to the letter included the name of the petitioner and showed that he had been paid $22,365 for 213 shares of preferred stock which had been redeemed.
In his income tax return for 1926 the petitioner treated the income received by him upon the redemption of his 213 shares of preferred stock in the Consolidated Naval Stores Company as capital gain and reported the amount thereof as $2,840.14 with the following1932 BTA LEXIS 1134">*1156 explanation:
| 213 shares Consolidated Naval Stores Co., 7% Preferred Stock Redeemed1/20/1926 at $105, received as a stock Dividend July 1, 1923 | $22,365.00 | |
| Owned common stock prior to March 1, 1913 | ||
| Common Stock Value March 1, 1913, per share | $275.00 | |
| Cost of Preferred, 1/3 of $275.00 per share | 91.66 | |
| 213 Shares at 91.66 per share | 19,524.86 | |
| 2,840.14 |
In determining the deficiency here involved the respondent determined that the amount received by the petitioner upon the redemption of his 213 shares of preferred stock in the Consolidated Naval Stores Company was taxable as a cash dividend and subject to surtax.
OPINION.
TRAMMELL: The petitioner contends that, as a result of the redemption in 1926 of the 213 shares of preferred stock in the Consolidated Naval Stores Company issued to him in 1923 as a stock dividend, he realized a gain of $5,325, which is taxable as a capital gain, since the stock was held by him for more than two years. The respondent contends that the entire amount of $22,365 received by the petitioner upon redemption of the stock is taxable as a cash dividend.
27 B.T.A. 44">*53 The parties have stipulated that, if we should hold that1932 BTA LEXIS 1134">*1157 the income resulting to the petitioner from the transaction is taxable as capital gain, the amount of such income is $5,325, instead of $2,840.14 as reported by him in his return.
The respondent contends that under the provisions of section 201(g) of the Revenue Act of 1926 the entire amount of $22,365 received by the petitioner upon the redemption of his stock is to be treated as a taxable dividend and subject to surtax. Section 201(g) of the Revenue Act of 1926 provides as follows:
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 distribution and cancellation or redemption in whole or in part essentially 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 subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.
At the time of the stock1932 BTA LEXIS 1134">*1158 dividend in 1923 the corporation had earned surplus accumulated since February 28, 1913, sufficient to pay such amount as well as at the time of redemption of such stock in 1926. There is no controversy between the parties as to the shares of the preferred stock in the Consolidated Naval Stores Company received by the petitioner in 1923 being a true stock dividend, nor is there any controversy between the parties respecting the redemption and cancellation by the Consolidated Naval Stores Company of its entire issue of preferred stock in 1926. Accordingly, the question presented for determination is whether the redemption and cancellation by the Consolidated Naval Stores Company of its preferred stock under the circumstances set out in our findings were at such time and in such manner as to make the amounts paid by the company upon such redemption and cancellation essentially equivalent to the distribution of a taxable dividend.
In , we considered the purpose and the manner of application of this provision of the act, and there said:
The ordinary intendment and purpose of the statute is plain enough. A stock dividend1932 BTA LEXIS 1134">*1159 being constitutionally free from tax, , and a stock redemption being a pro tanto liquidation of investment, the two could easily be used in a common plan so as to circumvent the tax which would be imposed if the distribution were made directly by way of ordinary dividend. To bar such circumvention, the Revenue Act of 1921 taxed the distribution as a dividend whether it was made directly as a dividend or by the more roundabout course, and the subsequent statutes have carried the 27 B.T.A. 44">*54 same provisions with such refinements of expression as were found necessary by experience to fulfill the purpose. Revenue Act of 1921, sec. 201(d); 1924, sec. 201(f); 1926, sec. 201(g); 1928, sec. 115(g). See H. Rept. 1, 69th Cong., 1st sess., p. 5; S. Rept. 52, 69th Cong., 1st sess. p. 15. While the obvious device, by a close corporation having a surplus, consisting of an expansion of capitalization, a stock issue and stock redemption, all within a short time pursuant to a unified plan, is plainly within the statute (see C.B. VIII-2, p. 133), the flexible language of the provision makes it clear also that its burdens were not to be imposed1932 BTA LEXIS 1134">*1160 arbitrarily (see C.B. VI-2 p. 14). As the taxpayer may not, in view of this statute, avoid the tax by an artificial device of empty forms, cf. , so the Government may not, under this statute, impose a tax merely because there has been a stock redemption, where the circumstances are free from artifice and beyond the terms and fair intendment of the provision. Of course, where the language of the statute is specific and inelastic there is no room for avoiding its effect, whatever the inconsistency with the general purpose as disclosed by later enactments, cf. ; but, generally speaking, the provisions should be treated as special and applied to promote its special purpose (see ).
When the stock dividend was declared in 1923, the corporation did not have sufficient cash available to pay the dividend in cash. This stock dividend was declared in order to bring the capitalization of the company to a figure which more nearly approximated the value of its assets and to have available to the corporation as capital for its business uses such earnings1932 BTA LEXIS 1134">*1161 and profits as it had accumulated. We find nothing in this case to distinguish it from our decision in the Brown case, supra.
The fact that an officer of the company in a subsequent year expressed the view that the redemption of the preferred stock was the equivalent of a cash dividend is not material. It is only his opinion, by which we are not bound, and which in fact throws no light upon the case. We must reach our conclusion on the facts. We see nothing in the case which indicates that the stock redemption should be treated as the equivalent of a cash dividend.
The amount of gain received in 1926 as the result of the redemption and cancellation of the stock should be taxed as capital gain. Sec. 208(a)(1) and (8) of the Revenue Act of 1926.
Reviewed by the BOARD.
Judgment will be entered under Rule 50.