*1448 1. The petitioner, a corporation, affiliated in 1928 with several other corporations, requested permission of the Commissioner to be allowed to file separate returns for that year instead of filing, as formerly, a consolidated return. The request was granted and the corporations elected to file separate returns. Held, that they were bound by such election and the Commissioner did not err in treating the separate returns as property filed and refusing thereafter to permit the filing of a consolidated return.
2. The petitioner declared a dividend payable partly in stock of another corporation at its par value, which was in excess of cost of the stock to petitioner. Held, that such declaration and payment did not result in taxable gain to petitioner.
*965 The petitioner has appealed from the respondent's determination of a deficiency in income tax for the year 1928 in the amount of $23,963.83.
A report in this proceeding was promulgated on April 28, 1933, but not officially*1449 reported, and decision was entered. Upon motion of counsel for petitioner the decision entered was vacated, the report promulgated was recalled, and further consideration of the proceeding was ordered.
The facts are stipulated and such as are material to the issues herein are adopted as our findings of fact.
FINDINGS OF FACT.
1. The petitioner is, and at all times herein mentioned was, a corporation organized under the laws of the State of Oregon, with an authorized capital stock of $100,000, consisting of 1,000 shares of the par value of $100 each, of which 610 shares were outstanding throughout the year 1928. Its incorporation occurred in 1919.
2. The petitioner was organized to manage and operate, and until in the spring of 1928 did manage and operate, under contract with the United States Shipping Board, a number of vessels engaged in the transpacific trade. To that end it established and maintained branches and agencies throughout the Orient, and acted as agent for intercoastal and other steamship companies, with world wide connections.
3. The China Pacific Company was incorporated under the laws of Oregon as a holding company in February, 1920. It had an*1450 authorized capital stock of $1,000,000.00, consisting of 10,000 shares of the par value of $100.00 each. In December, 1920, it was increased to 20,000 shares of the par value of $100.00 each.
4. In December, 1920, the China Pacific Company acquired all the issued and outstanding 610 shares of the capital stock of the petitioner at a cost of $91,500.00.
5. The Columbia Stevedoring Company was incorporated by the petitioner under the laws of Oregon on December 21, 1920, with an authorized capital stock of $5,000.00, all of which, except qualifying shares, was subscribed for by the petitioner, which was also the beneficial owner of the qualifying shares. The name of the Columbia Stevedoring Company was on December 28, 1920, changed to Portland Stevedoring Company.
6. In August, 1922, the petitioner sold to nominees of Kerr, Gifford & Company, of Portland, Oregon, one-half of the stock of this Portland Stevedoring *966 Company, but continued to own at all times thereafter and until April 25, 1928, the remaining one-half of the stock of Portland Stevedoring Company.
7. In May, 1924, Portland Stevedoring Company, by the declaration of a stock divident, increased*1451 its capital stock from $5,000.00 to $150,000.00 this increase in its capital being made up of $130,000.00 paid from earnings, while the remaining $15,000.00 was charged to good will.
On or about April 25, 1928, by appropriate action, the authorized capital stock of Portland Stevedoring Company was increased to $450,000.00, and by the payment out of earnings of a stock dividend, its outstanding capital stock was increased to $450,000.00. At the same time it changed its name to Steamship Jefferson Myers, Inc.
8. The change of name to Steamship Jefferson Myers, Inc. from Portland Stevedoring Company was made under an arrangement between Portland Stevedoring Company and States Steamship Company, by which the latter was to take over the stevedoring business and leave to Portland Stevedoring Company only the operation of the steamship "Hannawa."
9. After this change in the name to Steamship Jefferson Myers, Inc., States Steamship Company caused a new corporation to be organized under the laws of the State of Oregon, called Portland Stevedoring Company.
10. On April 27, 1928 the newly organized Portland Stevedoring Company purchased from Steamship Jefferson Myers, Inc. all*1452 its assets and business as of February 29, 1928, except the steamship "Hannawa", her appurtenances, etc., and her working capital of $50,000.00.
11. As of April 25, 1928 the petitioner herein was the owner of 2,250 shares of the capital stock of Steamship Jefferson Myers, Inc., acquired as follows:
| Initial subscription - 50 shares at par | $5,000.00 |
| Less 25 shares sold August 31, 1922 at par | 2,500.00 |
| 2,500.00 | |
| Stock dividend of May 21, 1924 (725 shares) | 72,500.00 |
| Stock dividend of April 25, 1928 (1,500 shares) | 150,000.00 |
| Total shares - 2,250 shares | |
| Par value $100 per share, total cost | 225,000.00 |
12. On April 25, 1928, the petitioner sold States Steamship Company 575 shares of stock in Steamship Jefferson Myers, Inc. at par, or for $57,500.00.
13. At a special meeting of the stockholders of the petitioner, held on May 15, 1928, at which 609 shares out of the 610 shares outstanding were actually present or represented by proxy, the following resolution was unanimously adopted by the affirmative vote of all the stockholders:
"BE IT RESOLVED that the directors be and they hereby are instructed to declare a dividend of six hundred nineteen thousand, *1453 seven hundred sixty dollars ($619,760.00), said dividend to be settled in the following manner: (1) by the transfer of the account receivable from the SS 'Peter Kerr' and owners as at February 29, 1928, $61,740.27; (2) by the transfer of the account receivable from the SS 'Eastern Knight' and owners as at February 29, 1928, $88,167.72; (3) by the transfer of sixteen hundred seventy-five shares (1,675) of the capital stock of Steamship Jefferson Myers, Inc., having a par value of one hundred sixty seven thousant, five hundred dollars ($167,500.00); (4) by the payment of cash in the sum of three hundred two thousand, thousand, three hundred fifty-two dollars and one cent ($302,352.01)."
*967 The action taken at this stockholders' meeting was thereafter approved by the absent stockholder, J. C. Ainsworth, by endorsement of his approval upon the miutes of the meeting.
14. Immediately after the adjournment of the stockholders' meeting referred to in the preceding paragraphe hereof, the Board of Directors of the petitioner met on said 15th day of May, 1928, and upon motion duly made and seconded, the following resolution was unanimously adopted:
"RESOLVED that the sum of six*1454 hundred nineteen thousand, seven hundred sixty dollars ($619,760.00) be and it is appropriated and set aside from the surplus profits of the company for the payment of a ten hundred sixteen percent (1,016%) dividend upon its outstanding capital stock, said dividend to be due and payable on May 16, 1928, to the China Pacific Company, which is the sole legal owner of all the capital stock of the company, except the directors' qualifying shares, and is the beneficial owner of these shares also, and therefore entitled to the entire dividend.
"RESOLVED FURTHER that said dividend be settled in the following manner:
"(a) By the transfer to China Pacific Company of the accounts receivable as at February 29, 1928, from the SS 'Peter Kerr' and owners, sixty-one thousand seven hundred forty dollars twenty-seven cents ($61,740.27); and from SS 'Eastern Knight' and owners, eighty-eight thousand, one hundred sixty-seven dollars seventy-two cents ($88,167.72).
"(b) By the transfer to China Pacific Company of sixteen hundred seventy-five (1,675) shares of the capital stock of Steamship Jefferson Myers, Inc.
"(c) By cash payment to China Pacific Company of three hundred two thousand, three*1455 hundred fifty-two dollars one cent ($302,352.01).
"RESOLVED FURTHER that the Treasurer of this company be and is hereby authorized and directed to give notice of such dividend and to pay same when due."
15. At all times herein mentioned after December, 1920, China Pacific Company was the beneficial owner of the entire outstanding capital stock of the petitioner, namely, 610 shares. The dividend declared in the resolution set out in paragraph 14 of this stipulation was paid China Pacific Company by the transfer of the accounts receivable, referred to in sub-paragraph (a) of the resolution, by the transfer of 1,675 shares of the capital stock of Steamship Jefferson Myers, Inc., and by the payment of cash in the sum of $302,352.01. This dividend was returned by the recipient as a distribution received in 1928 from a domestic corporation in the normal course of business. After the payment of this divident, your petitioner had no assets in excess of the sum of about $65,000.00.
16. In the fall of 1927 negotiations were begun between K. D. Dawson, then manager of the petitioner, and the United States Shipping Board, for the purchase by a corporation to be later formed if the*1456 negotiations were successful, of the vessels owned by the Shipping Board and operated by the Columbia Pacific Shipping Company in the Orient trade. After the terms and the purchase price of the vessels had been agreed upon. K. D. Dawson, with others, organized, in February, 1928, under the laws of the State of Nevada, a corporation known as States Steamship Company.
17. States Steamship Company, having in the spring of 1928 acquired the title to the vessels theretofore managed and operated for the United States Shipping Board by your petitioner, succeeded to the management and operation of the vessels, and to that end took over the petitioner's personnel and organization and office in Portland, Oregon. Inasmuch, moreover, as the branches and agencies established by the petitioner in the Orient would be *968 valuable to States Steamship Company, the latter arranged with China Pacific Company for the purchase of all the capital stock of your petitioner. The sale of the stock of your petitioner to States Steamship Company was consummated in November, 1928, effective as of June 30, 1928. The purchase price was fixed at $148,265.06, and in its return of income for 1928 China*1457 Pacific Company reported a gain of $56,765.06, resulting from a sale of petitioner's capital stock.
18. A consolidated return of income for the year 1927 was filed by China Pacific Company, in which there was included the operations of the petitioner and of Asiatic-American Steamship Company, an inactive corporation, whose stock was also owned by Columbia Pacific Shipping Company.
On November 20, 1928, the petitioner wrote the Commissioner in part as follows:
According to our interpretation of Section 142-A of the Revenue Act of 1928, corporations which filed a consolidated return for the taxable year 1927 must, for the taxable years 1928, file a return on the same basis unless permission to change the basis is granted by the Commissioner of Internal Revenue.
This Company, with China Pacific Company, filed a consolidated return for the taxable year 1927. The return was filed in the name of the parent company, China Pacific Company.
During this year ownership of this corporation has changed and no longer rests with China Pacific Company.
China Pacific Company is in process of liquidation and has filed notice of dissolution with the Corporation Commissioner of the*1458 State of Oregon. This Company, Columbia Pacific Shipping Company, will continue to do business.
In view of these circumstances we wish to file a separate return for the taxable year 1928 and we are therefore, requesting your permission to do so as required under Section 142-A of the Revenue Act of 1928.
On December 8, 1928, the Commissioner wrote in reply thereto, calling the petitioner's attention to article 632 of Regulations 69, and advised it that before its application to change the basis of filing its income tax returns would be given proper consideration the application would have to be made and filed in accordance with that article.
On January 8, 1929, S. P. Fleming, secretary-treasurer of the petitioner, having at no time been an officer, stockholder, or director of the China Pacific Co., executed an affidavit on behalf of the petitioner, in which permission to file a separate return for it for the year 1928 was requested.
In a letter to petitioner dated and mailed January 24, 1929, the
Commissioner stated:
In accordance with your request your corporation, China Pacific Company and Asiatic American Steamship Company are hereby granted permission to file separate*1459 income tax returns for the taxable year 1928. All corporations affiliated therewith must abide by the permission. (Reference SM 2683, C.B. IV-1, page 238.)
*969 A Copy of this letter, three of which are enclosed, should be attached to each return for the taxable year 1928, when filed, as authority for the change herein granted.
On or about March 14, 1929, separate returns were filed for the year 1928 by the Columbia Pacific Shipping Co. (petitioner), by the Asiatic-American Steamship Co., and by the China Pacific Co., and on or attached to each return was information to the effect that the Commissioner had granted the requisite permission for filing such returns.
The cost to petitioner of the aforesaid 1,675 shares of Steamship Jefferson Myers, Inc., was $1,861.11.
OPINION.
ARUNDELL: The errors assigned by the petitioner are (a) that the Commissioner erred by holding that it and the China Pacific Co., the owner of all of the capital stock of the petitioner, properly filed separate returns of income of 1928, and (b) that the Commissioner erred by including as taxable income of the petitioner the amount of $165,638.89, claimed to represent a profit realized by*1460 petitioner in connection with the declaration and discharge of a dividend declared May 15, 1928, because of the difference between the cost ($1,861.11) and the declared fair market value ($167,500) as of the date of distribution of 1,675 shares of the capital stock of the Steamship Jefferson Myers, Inc., transferred to the China Pacific Co. as a divided on May 16, 1928.
In the report heretofore promulgated it was held as follows with respect to the first issue: "The first error assigned is not discussed in the brief for the petitioner, though no statement that it is abandoned is made therein. The record shows that S. P. Fleming, who was secretary-treasurer of petitioner, requested permission to file separate returns for the taxable year 1928 in view of the fact that the China Pacific Co. was in process of liquidation and had filed notice of dissolution with the Commissioner of Corporations for the State of Oregon. The permission was granted by the Commissioner after the petitioner complied with the provisions of article 632 of Regulations 69, to which its attention was directed.
"On March 14, 1929, the petitioner, the Asiatic-American Steamship Co. and the China Pacific Co.*1461 filed separate returns, indicating on the returns or attached thereto the information that the Commissioner had granted permission for so doing, section 142(a) of the Revenue Act of 1928 authorizing the granting of such permission by the Commissioner. Where a separate return is filed by one member of an affiliated group pursuant to the election afforded in the revenue act, the remaining members of the group may not file *970 a consolidated return and all members of the group are thereby forced to file returns and compute tax liabilities on a separate basis. ; ; .
"The returns having been filed and accepted by the Commissioner, he was at liberty to proceed to examine and audit them and to reject or refuse to receive amended returns, consolidated or otherwise. Such under the statute was within his power and discretion. ; certiorari denied, *1462 ; ; ; .
"Under the facts and circumstances, fully set forth in our findings of fact, we are of the opinion and so hold that the petitioner, the Asiatic-American Steamship Co. and the China Pacific Co. having filed separate returns for the year 1928, which were accepted by the Commissioner as properly filed, the Commissioner committed no error in refusing to accept from the petitioner a consolidated return for the period in 1928 during which those companies were affiliated."
Upon reference to the Board the prior opinion, in so far as it deals with the first issue, as set out above, is affirmed.
The second issue is whether petitioner realized income through the declaration and payment of a dividend in the capital stock of Steamship Jefferson Myers, Inc. The cost of the stock to petitioner ws $1,861.11 and the par value $167,500. Respondent has treated par value as also being fair market value and there is no evidence to show error in this respect. *1463 The difference of $165,638.89 between cost and fair market value the respondent has included in income on the theory that upon the declaration of the dividend on May 15, 1928, petitioner incurred a liability to its stockholders in a definite amount and that the partial discharge thereof by transferring property costing less than the value at which it was transferred to the stockholders constituted income. In the prior report the respondent's action in this respect was sustained. Upon consideration by the Board we are unable to see any substantial distinction between the facts in this case and those in . In that case, upon consideration of the dividend resolution, we reached the conclusion that it imposed upon the corporation only an obligation to distribute in kind, that it was discharged in that way, and that, upon authority of the decided cases, no gain or loss resulted to the corporation. The cases dealing with this question are reviewed at length in the opinion in that case and no useful purpose would be served in again setting them out here. In this case we conclude that the intent of the directors of petitioner*1464 as expressed in the resolution of May 15, 1928, was to declare a dividend payable to the *971 extent of $167,500 in stock of Steamship Jefferson Myers, Inc., and that the dividend was paid in that way, and, following , petitioner realized no taxable gain.
Reviewed by the Board.
Decision will be entered under Rule 50.
SEAWELL, dissenting: I disagree with the conclusion reached on the second issue.
When petitioner's board of directors resolved, as it did, that "$619,760.00 be and it is appropriated and set aside from the surplus profits of the company for the payment of a ten hundred sixteen percent (1,016%) dividend upon its outstanding capital stock," it created a liability of itself to its sole stockholder in the sum of $619,760. . When petitioner discharged that liability, under a further resolution of its directors and the consent and acquiescence of the stockholder, by the transfer to the stockholder of assets of the petitioner at a valuation equal to the liability, as it did, petitioner received income in an amount equal to the difference*1465 between the cost of those assets to petitioner and the liability so discharged. ; . If a dividend in kind was intended there is no apparent reason to mention the amount of the dividend in dollars or the percentage of the capital stock, for neither was involved.
BLACK, STERNHAGEN, and ADAMS agree with this dissent.