*732 In 1939 the petitioner owned 210 shares of the Colonial Trust Co. of Waterbury, Connecticut, which company redeemed one-half of its outstanding shares at a price of $220 per share, which was approximately the fair market price of the shares at the time. Held, that the redemption of the stock was not made at such time and in such manner as to make the distribution of the shares essentially equivalent to the distribution of a taxable dividend; held, further, that the basis for computing the gain or loss upon the shares redeemed is the cost to the petitioner of the shares represented by certificates which the petitioner designated to the transfer agent as the shares to be redeemed.
*111 This proceeding is for the redetermination of a deficiency in income tax for the year 1939 in the amount of $11,621.49. The question for consideration is whether a distribution received by the petitioner as a stockholder of the Colonial Trust Co. of Waterbury, Connecticut, was a taxable dividend*733 or a distribution in partial liquidation of the company. The case is submitted upon a written stipulation of facts, supplemented by the testimony of witnesses. The stipulation is hereby incorporated as a part of our findings of fact.
FINDINGS OF FACT.
The petitioner is an individual, residing at Waterbury, connecticut. His return for the taxable year was filed with the collector of internal revenue for the district of Connecticut.
The Colonial Trust Co. was organized under the laws of Connecticut in 1899. Since the completion of its organization it has *112 been engaged in the business of banking, with its principal office and place of business in Waterbury. It has operated a trust department since its organization and a savings department since 1924. On and prior to November 14, 1939, the trust company had 10,000 shares of common stock of the par value of $100 a share outstanding. It originally issued 4,000 shares of its common stock on 1899, for which it received a total of $500,000, of which it credited $100,000 to surplus and $400,000 to capital. An additional 1,000 shares of its common stock were issued on January 1, 1921, for which the trust company received*734 a total of $200,000, of which $100,000 was credited to surplus and $100,000 to capital. It issued 5,000 additional shares of common stock on January 2, 1929, under circumstances set forth hereinafter, for which it received $1,500,000, of which $1,000,000 was credited to surplus and $500,000 to capital.
During the years immediately preceding 1929 the corporation found a great increase in the demand for loans from its commercial savings department but there was no corresponding increase in deposits. At the close of the year 1927 the bank had loans and discounts outstanding in the amount of $6,585,017.17 and deposits in its commercial department in the amount of $6,939,002.69. At the close of the year 1928 the bank had loans and discounts outstanding in the amount of $7,212,595.22 and deposits in the amount of $6,826,196.60 in its commercial department. Since there were not sufficient deposits on hand to meet the demand for loans, it was decided to reise additional capital funds by the issuance of 5,000 shares of common stock of a par value of $100 per share, to be sold at a subscription price of $300 per share. This stock was issued on January 2, 1929, and the proceeds of the*735 issue in the amount of $1,500,000 were credited $1,000,000 to the corporation's surplus account and $500,000 to capital.
The loans and discounts of the bank reached their peak at the close of 1930 and thereafter steadily declined. As of December 31, 1938, the bank had loans and discounts outstanding in the amount of $3,108,403.24. After 1930 the deposits in the bank increased until on December 31, 1938, the bank had deposits in its commercial department in the amount of $8,662,994.68. The officers of the bank believed that there would be no immediate increase in the demand for loans, and because the bank had a substantial amount of excess funds on hand which could not be profitably invested they recommended that the excess be distributed to the stockholders. The president of the bank conferred with its attorneys to determine the proper method of making the distribution. At these conferences the tax effects of various methods of distributing funds were considered. The bank's attorney advised that a distribution in partial liquidation of the bank would not constitute a taxable dividend to the stockholders. The *113 bank officers were also desirous of extending the market*736 for the bank's stock. To attain the latter objective it was decided to reduce the par value of the one-half of the outstanding shares that would remain after the liquidation.
At a meeting held on October 10, 1939, and adjourned to November 14, 1939, the stockholders of the company duly adopted the following resolutions:
RESOLVED: That the Directors be and they hereby are authoriaed, subject to the approval of the Banking Commission, to reduce the Company's capital stock from One Million Dollars ($1,000,000), consisting of ten thousand (10,000) shares of the par value of One Hundred Dollars ( $100) a share, to Five Hundred Thousand Dollars ($500,000), consisting of five thousand (5,000) shares of the par value of One Hundred Dollars ($100) a share, and in consideration of such reduction and the cancellation and retirement of five thousand (5,000) shares of its capital stock to distribute in partial liquidation of the Company and the pro rata return to the stockholders of their capital investment One Million One Hundred Thousand Dollars ($1,100,000) of the Company's capital funds, Five Hundred Thousand Dollars ($500,000) to be charged to capital stock and Six Hundred Thousand Dollars*737 ($600,000) to be charged to the Company's Surplus contributed by stockholders; such distribution to be a pro rata distribution in cash to stockholders of record at a date fixed by the Directors upon the basis of Two Hundred Twenty Dollars ( $220) a share for the five thousand (5,000) shares so cancelled and retired; and
RESOLVED: That, following a reduction of the Company's capital stock from One Million Dollars ($1,000,000), consisting of ten thousand (10,000) shares of the par value of One Hundred Dollars ( $100) a share to Five Hundred Thousands Dollars ($500,000), consisting of five thousand (5,000) shares of the par value of One Hundred Dollars ($100) a share, the Directors be and they hereby are authorized, subject to the aproval of the Banking Commission, to change the number and par value of the shares of the capital stock so reduced to Five Hundred Thousand Dollars ($500,000) from five thousand (5,000) shares, par value of One Hundred Dollars ( $100) a share, to twenty thousand (20,000) shares, par value of Twenty-Five Dollars ( $25) a share.
Immediately following the stockholders' meeting on November 14, 1939, the directors of the company acted upon the resolutions of*738 the stockholders. The directors voted that in consideration of the cancellation and retirement of 5,000 shares of stock of the bank it would distribute pro rata to the stockholders:
* * * in partial liquidation of the Company and in pro rata return to the stockholders of their capital investment One Million One Hundred Thousand Dollars ($1,100,000) of the Company's capital funds, Five Hundred Thousand Dollars ($500,000) to be charged to capital stock and Six Hundred Thousands Dollars ($600,000) to be charged to surplus contributec by the stockholders; such distribution to be a pro rata distribution in cash upon the basis of Two Hundred Twenty Dollars ( $220) a share for the five thousand (5,000) shares so cancelled and retired; * * *
In addition, the directors voted to change the number of shares and par value of the company's stock which would then remain outstanding from 5,000 shares of $100 par value to 20,000 shares of $25 *114 par value. The entire plan was duly approved by the Banking Commission of the State of Connecticut. The entire transaction, including the distribution to the stockholders and the reduction in the par value of the remaining stock, was completed*739 by August 22, 1940. At the close of business on November 13, 1939, the assets and liabilities of the trust company as shown by its balance sheets were as follows:
| Assets | Liabilities | ||
| Loans and discounts | $3,211,714.93 | Capital | $1,000,000.00 |
| U.S.Governments | 1,111,600.01 | Surplus | 2,000,000.00 |
| Other investments | 414,326.53 | Undivided profits | 853,459.05 |
| Cash and due from banks | 8,005,760.62 | Reserves 1 | 452,313.65 |
| Banking house | 299,247.52 | Deposits - commercial department | 9,200,379.93 |
| Other assets | 463,503.02 | Deposits - savings department | 858,509.48 |
| Savings department assets | 858,509.48 | ||
| Total | 14,364,662.11 | 14,364,662.11 |
On November 14, 1939, the corporation had earnings and profits accumulated after February 28, 1913, of not less than $1,100,000. There*740 were numerous sales of small lots of the stock of the company in over-the-counter transactions between January 1 and November 14, 1939, at prices ranging from $210 to $205 per share.
On and prior to November 14, 1939, the petitioner was the owner of 210 shares of the par value of $100 each of the capital stock of the trust company, purchased as follows:
| Certificate No. | Number of shares | Acquisition date | Cost |
| 102 | 10 | ||
| 164 | 40 | ||
| 200 | 15 | Prior to Mar. 1, 1913 | 1 $13,000.00 |
| 394 | 15 | Jan. 3, 1921 | 3,000.00 |
| 592 | 80 | Jan. 2, 1929 | 28,643.36 |
| 949 | 5 | Feb. 10, 1931 | 2,525.00 |
| 957 | 24 | Apr. 28, 1931 | 12,120.00 |
| 991 | 20 | Apr. 9, 1932 | 7,500.00 |
| 1,125 | 1 | Nov. 28, 1934 | 337.00 |
The petitioner delivered all of his stock certificates to the trust company on November 16, 1939, together with a letter of transmittal designating the following certificates and shares for retirement in accordance with the plan adopted on November 14, 1939:
| Certificate No. | Shares |
| 949 | 5 |
| 592 | 56 |
| 957 | 24 |
| 991 | 20 |
| Total | 105 |
*115 Immediately following receipt of the petitioner's letter of transmittal the trust company canceled*741 each of the stock certificates enclosed therewith, and delivered to the petitioner its check for $23,100, representing his pro rata share of the funds distributed, together with new stock certificates evidencing the petitioner's ownership of 420 shares of the capital stock of the par value of $25 a share.
OPINION.
SMITH: The principal issue presented for decision is whether the distribution of cash received by the petitioner from the Colonial Trust Co. is taxable in full as an ordinary dividend or is to be treated as a distribution in partial liquidation of the company. If there was a complete cancellation or redemption by the corporation of a part of its stock the distribution was in partial liquidation of the corporation as defined in section 115(i) of the Revenue Act of 1938, unless the cancellation or redemption was essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g). The petitioner contends that the distribution in question was in partial liquidation of the company and resulted in a capital loss to him on the basis of the actual cost of shares of stock which he identifies as having been redeemed. The respondent contends*742 that in the event we find there was a partial liquidation of the corporation the gain or loss must be computed upon the basis of the average cost of all of the petitioner's stock in the trust company and not upon the basis of the actual cost of shares claimed to have been redeemed.
On all of the evidence, we hold that the Colonial Trust Co. did in fact completely redeem and cancel a part of its stock in 1939. The respondent's argument that there was no partial liquidation of the corporation because it did not in any way curtail its business activity and was not in the process of winding up its affairs is without merit. ; . The pertinent facts are that the corporation called in and canceled 5,000 shares, or one-half of its total outstanding stock, for the amount of $1,100,000 in cash, which it charged entirely to its capital and surplus accounts. The amount of $220 per share which was distributed was approximately equivalent to the fair market value of the shares redeemed. This fact distinguishes the instant case from *743 , in which the amount distributed to the stockholders in cancellation of a part of the stock bore no reasonable relation to the fair market value of the stock redeemed and did not return to those stockholders the proportion of the assets of the corporation to which those shares of stock would entitle them. The distribution plainly comes within *116 the very letter of the statute and, being in partial liquidation of the corporation, is to be treated as in part or full payment in exchange for the stock in accordance with the provisions of section 115(c).
We next examine the facts in this case to determine whether section 115(g) is applicable. The application of this provision of the law in any case depends entirely upon the particular facts. . There is no question that the stock in the instant case was all issued for bona fide business reasons. More than one-half of the total paid therefor was paid in 1929. It appeared entirely probable at that time that there would be a substantial increase in the demand for loans from the bank, to meet which additional funds were*744 required. Soon after the stock was issued, however, the business depression struck and in the ensuing years the bank found itself with more capital than it could use profitably. For this reason it decided to return some of it to its stockholders.
The distribution in 1939 was made for sound business reasons and was not a step in an apparent plan to distribute earnings in a manner which would save taxes for the stockholders, as in . The stock was not redeemed at the request of stockholders requiring financial assistance, as in . It is true that the corporation did have earnings which accrued after February 28, 1913, in excess of the amount distributed, as did the taxpayer in . In the instant case, however, there is adequate and satisfactory explanation for the time and manner of the distribution, whereas such explanation was lacking in the Goldstein case. On the facts of this case we hold that the cancellation and redemption of its stock by the Colonial Trust Co. was not essentially equivalent*745 to the distribution of a taxable dividend within the meaning of section 115(g). .
The final question is whether gain or loss to the petitioner is to be computed upon the basis of the actual cost of the shares which he designated for redemption or upon the average cost of each share of stock owned by him. If the Colonial Trust Co. had merely elected to retire one-half of its outstanding shares at $220 per share and the petitioner had surrendered the certificates which he did surrender for the cancellation of 105 shares, no question could arise but that the petitioner would be entitled to use the cost of those shares as the basis for computing gain or loss upon the cancellation. We do not think the fact that the company elected at the same time to reduce the par value of the remaining 5,000 shares from $100 to $25 per share and for the issuance therefor of 20,000 shares of the new stock has any bearing upon the question of the right of the *117 petitioner to designate the certificates which were to be canceled. In *746 , the Supreme Court held that a person having a margin account with a broker and making purchases and sales might designate to the broker the shares of stock which he wished sold as those purchased on a certain date. This was held to be a sufficient identification of the shares to warrant the computation of gain or loss upon the cost of the shares thus identified. The Court specifically pointed out that certificates for shares provide the ordinary means of identification but that that was not the only possible means. In this proceeding the certificates to be canceled were specifically designated. We see no reason why the petitioner should not be permitted to use the cost of the 105 shares covered by the certificates designated for redemption as the basis for the computation of the gain or loss upon the redemption of such shares.
Decision will be entered under Rule 50.
Footnotes
1. Includes account entitled reserve for losses in the amount of $385,464.61. Total credits to this account from its establishment March 31, 1932, through November 13, 1939, aggregated $971,443.98. Of these credits. $500,000 represented a transfer from surplus on December 22, 1932, and $471,443.98 represented transfers from time to time during said period from profit and loss. ↩
1. March 1, 1913 value. ↩