*865 The petitioners are stockholders of the Badger Oil Co., a Texas corporation with a capital stock of $112,500 divided into 112,500 shares of stock of a par value of $1 each. In 1935 it sold a portion of its assets at a large profit, but retained assets which had a value in excess of the par value of its shares. In 1935 it declared two dividends of $1.50 and $1 per share as "liquidating" dividends No. 1 and No. 2. None of its shares of stock were canceled or redeemed nor was the par value of the shares reduced. Held, that the dividends received by the petitioners were ordinary dividends and not liquidating dividends.
*336 These proceedings involve income tax deficiencies for the year 1935 in the following amounts:
| Petitioner | Docket No. | Deficiency |
| Bertha K. Bynum | 94378 | $339.61 |
| B. C. D. Bynum | 94379 | 339.61 |
| Nora C. Early | 94380 | 214.49 |
| Allen Early | 94381 | 233.53 |
| Willie Elliott Kirk | 94389 | 749.08 |
| R. D. Kirk | 94390 | 749.08 |
The single issue for our determination, which is common*866 to all of the proceedings, is whether a dividend distribution made in 1935 by the Badger Oil Co., of which the petitioners were stockholders, was an ordinary dividend or a liquidating dividend. The proceedings were consolidated for hearing.
FINDINGS OF FACT.
The petitioners are all residents of Amarillo, Texas, and are stockholders in the Badger Oil Co., a Texas corporation, organized in 1926 by petitioners B. C. D. Bynum and R. D. Kirk and three other associates to acquire and operate oil and gas leases and properties.
The Badger Oil Co., hereinafter sometimes referred to as the corporation, was capitalized at $112,500, divided into 112,500 shares of stock of a par value of $1 each. This stock was all issued and paid for, the petitioner B. C. D. Bynum subscribing for 109,500 shares and paying therefor $42,000 cash and certain oil and gas leases covering *337 approximately 1,165 acres of land situated in Hutchinson and Carson Counties, Texas.
On October 8, 1930, the corporation purchased an additional lease covering approximately 126 acres of land, on which there was at that time one producing oil well.
In May 1934 the corporation purchased for approximately*867 $40,000 the fee to the lands covered by the aforesaid leases, thereby acquiring interest of from two-fifths to four-fifths of the mineral rights therein in addition to the leasehold interests which it already owned. In acquiring the fee interests in the leasehold lands it was necessary to purchase the entire tract known as the Lewis ranch, containing approximately 2,900 acres. Fractional parts of the mineral rights in this tract had been previously conveyed by the owners. Only about one-half of the tract was potential oil land.
The primary purpose of the corporation in acquiring such fee interests was to obviate the drilling of offset wells on the demand of the royalty owners. The corporation lacked sufficient funds to drill the number of wells which the royalty owners might lawfully have required it to drill. It was also considered that at the purchase price of approximately $40,000 the property was a good investment.
Prior to 1935 the corporation drilled seven producing wells on the Lewis tract, all of which were in operation at the beginning of that year. Up to January 31, 1935, the total production of these wells was approximately 432,600 barrels of oil having a gross*868 value of $405,781.06, of which the corporation's portion was $354,957.55. Altogether there were 13 producing wells on the Lewis tract at January 1, 1935.
On February 1, 1935, the corporation sold to the International Petroleum Corporation all of its leasehold interests, together with the wells and equipment thereon, for a consideration of $200,000 cash and 33 promissory notes for $5,000 each, aggregating $165,000, payable consecutively one each month beginning August 1, 1935, with interest at 5 percent per annum. All of these notes were paid off by the International Petroleum Corporation in August 1935.
After the sale of its leasehold interests the directors of the corporation issued a call for a special meeting of the stockholders "for the purpose of considering and acting upon the matter of liquidating the company." The meeting was duly advertised in the local papers. The stockholders' meeting was held on the date named and a resolution was passed reading in part as follows:
WHEREAS, the purpose for which the corporation was organized, viz:
"To contract for the lease and purchase of the right to prospect for, develop, and use petroleum and gas, and also the right to*869 erect, build and own all necessary oil tanks, cars, and pipes for the operation of the business," *338 no longer exists and it is not the desire of the company to further engage in or to renew engagement in the prospecting and developing for oil and gas properties.
NOW THEREFORE, BE IT RESOLVED, that the Board of Directors of this company be authorized and instructed to pay out the cash funds of this company in the form of liquidating dividends, after having first paid or provided for all unpaid or accrued obligations, such liquidating dividends to be paid out of the cash on hand and to be received from the collection of the promissory notes above mentioned, and from all other sources of revenue.
BE IT FURTHER RESOLVED, that the Board of Directors be authorized and instructed to take such action as is necessary to sell, liquidate and dispose of the remaining assets of the company at such time and in such manner as in their best judgment shall be deemed to be for the best interests of the stockholders without sacrificing the company's assets.
BE IT FURTHER RESOLVED, that after having liquidated the assets of the Badger Oil Company in the manner outlined above, the charter*870 of this company shall be surrendered and the Board of Directors be further authorized and instructed to execute such Certificate of Dissolution as is required by the Secretary of State to effect the dissolution of a corporation.
Immediately following the stockholders' meeting the directors met and declared a dividend of $1.50 per share on outstanding shares of stock by the following resolution:
WHEREAS, this company has on hand approximately two hundred thousand ($200,000.00) dollars of cash funds representing the proceeds of the sale of its properties, and
WHEREAS, it is the desire of the stockholders to liquidate said company;
NOW THEREFORE, BE IT RESOLVED that a liquidating dividend be declared on the outstanding stock of this company at the rate of $1.50 per share, payable immediately.
BE IT FURTHER RESOLVED, that the dividend be paid only upon presentation of the stock certificate to the President and Secretary of the company, and that the date of payment, the amount thereof, and the description of the dividend as being a liquidating dividend No. 1 be written or stamped upon the face or back of every stock certificate so presented.
In August 1935, after receipt*871 of the balance of the purchase price of $165,000 from the International Petroleum Corporation, the corporation declared a further dividend of $1 per share on its outstanding capital stock. The resolution by which this dividend was issued, passed at a directors' meeting held August 16, 1935, reads as follows:
BE IT RESOLVED, that liquidating dividend No. 2 in the amount of $1.00 per share be immediately paid on the stock of this company upon the presentation of such stock for the affixing of legends similar in effect to the legends stamped upon the certificates recording the distribution of payment of liquidating dividend No. 1.
BE IT FURTHER RESOLVED, That the remaining funds of the company on hand, or so much of them as is deemed necessary, be invested in safe securities to be used as a fund for the payment of income taxes due to be paid during 1936 on the profits resulting from the sale of the properties heretofore sold.
The purchase of the securities authorized in the above resolution of August 16, 1935, was made by the corporation on August 9, 1935, *339 the corporation on that date purchasing $70,000 par value of Federal Farm Mortgage bonds at $101.4 for a total*872 purchase price of $70,787.50.
In July 1935 suit was brought against the Badger Oil Co. for the setting aside of the deed covering the purchase of the fee of and royalty interests in the Lewis ranch. In this suit the original sellers alleged fraud in the procurement of the title and prayed that the property be returned to the original owners, together with a large sum as damages, and the oil royalty was impounded in the hands of the pipe line company after June 1935. The Badger Oil Co. compromised with the plaintiffs in this suit and in January 1936 paid an additional $50,000, together with court costs, plus attorney fees, or a total of $56,234.18, and judgment was entered quieting title of the Badger Oil Co. to the lands and royalty interests.
The Federal Farm Mortgage bonds referred to above were sold on February 23, 1936, in order to provide the corporation with funds with which to make the $50,000 payment to quiet title to the property.
On December 15, 1936, it became necessary for the corporation to borrow $6,000 from one of its principal stockholders, B. C. D. Bynum, to pay the final installment of its 1935 income tax.
Prior to the transfer of its leasehold estate*873 to the International Petroleum Corporation, the corporation's accumulated surplus did not exceed $25,000 and no dividends had ever been paid. The corporation's gross income from the leasehold estate for the year 1934 amounted to $60,227.45 and the net income after depletion amounted to $13,098.57. The corporation's receipts from royalties amounted to $3,504.76 in 1935, $42,782.38 in 1936, $43,965.47 in 1937, and $34,966.42 in 1938. The corporation also received from grazing leases $500 in 1936, $200 in 1937, and $297.80 in 1938.
The balance sheets of the corporation for the years 1934 to 1938, inclusive, show a deficit for each year of from about $17,000 to over $34,000, whereas the balance sheets prepared by the Commissioner's office, reduced to a so-called "cost basis", show an earned surplus of between $14,000 and $32,000 for each year. This difference is due for the most part to the treatment of the Lewis lease, which was turned over to the corporation by the organizers in part payment for its capital stock. The lease was acquired by the stockholders in consideration for the agreement to drill one oil well, and, since this agreement was assumed by the corporation, the Commissioner*874 considered that the lease cost the organizers nothing and that on turning it in to the corporation, together with $40,000 cash, in exchange for the corporation's capital stock there resulted a capital deficit of $60,000, which was reflected in each of the corporation's balance sheets as prepared by the Commissioner.
*340 Since 1935 several offers of around $200,000 have been made to the corporation for its royalty interests in the aforesaid Lewis lease, but they have been rejected, the officers and directors indicating that they would be unwilling to sell for less than about $300,000, which they considered a fair price for the royalties.
OPINION.
SMITH: The only question to be determined in these proceedings is whether the dividends received by the petitioners in 1935 from the Badger Oil Co. were liquidating dividends, as the petitioners contend, or ordinary dividends, as the respondent contends. The pertinent provisions of the statute are found in section 115 of the Revenue Act of 1934, which provides in part as follows:
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title * * * means any distribution*875 made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) SOURCE OF DISTRIBUTIONS. - For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * * *
(c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, * * *
* * *
(i) DEFINITION OF PARTIAL LIQUIDATION. - As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.
Dividends paid by the Badger Oil Co. in 1935 were designated as liquidating dividends in the resolutions of the stockholders and directors by which they were authorized. But the name by which they are called does not determine their character. That is a question of fact to be determined from all of the circumstances. *876 , affirming ; ; . In , we said:
* * * Liquidation has been defined as the operation of winding up the affairs of a corporation by realizing upon its assets, paying its debts and appropriating the amount of its profit or loss. , and cases there cited. It differs from the normal operation of the corporation for current profit in that it ordinarily results in the winding up of the corporation's affairs. There must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. It contemplates an impairment of capital or a retirement of outstanding stock, though a distribution, if one of a series of *341 distributions in liquidation may be a liquidating dividend even if it, of itself, does not impair capital. Liquidation can not be brought about by mere declaration, and the question of whether*877 a corporation is in liquidation is therefore one of fact. See ;; affd., ; ; affd., ; ; .
By section 22(a) of the Revenue Act of 1934 "gross income" is defined as including gains, profits and income derived from "dividends" or "from any source whatever." By section 115(a) the term "dividend" is defined as "any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913." We can not doubt from the evidence of record in these proceedings that the dividends paid by the Badger Oil Co. in 1935 were out of earnings or profits. The evidence is to the effect that after the payment of these dividends the Badger Oil Co. had assets for which it had refused offers of more than the par value of the shares of stock outstanding; and there is no evidence that the fair market value of the assets paid in for the shares*878 of stock at the time of the organization of the corporation was in excess of the par value of its shares. Therefore, the denomination of the dividends paid in 1935 as liquidating dividends is immaterial. The corporation was not in liquidation in 1935. The recipients of the dividends are taxable upon the amounts received as upon the receipt of ordinary dividends.
Decision will be entered for the respondent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: B. C. D. Bynum; Nora C. Early; Allen Early; Willie Elliott Kirk; and R. D. Kirk. ↩