Memorandum Opinion
STERNHAGEN, Judge: A deficiency for 1941 of $956.83 in income tax and $1,075.38 in excess profits tax resulted from two adjustments, and the taxpayer assails the holding that it realized income in the amount of the difference between the cost of Union Pacific bonds and their higher fair market value when they were distributed to shareholders as a dividend in kind. All the facts are stipulated.
[The Facts]
The petitioner, a New York corporation, filed its returns with the Collector for the Third District of New York. Its shares were held 51 per cent by Edward L. Smith and 49 per cent by Smith's wife. By a directors' resolution of December 20, 1941, it declared a dividend of $30,000 par value of Union Pacific 1st 4% 1947 bonds with accrued interest, payable December 23, 1941. Pursuant to the resolution, the corporation distributed the bonds pro rata to the shareholders. The bonds had been purchased by the corporation in 1933 at a cost of $29,987.50, and on the date of distribution the fair market value was $33,037.50, *262 an increase of $3,050.
The Commissioner included the $3,050 in the corporation's income for the year of the dividend, notwithstanding that the declaration was not expressed in money but entirely in terms of the bonds distributed. This determination is contrary to the decision in . In , the Board held that the increase in value of shares held by the taxpayer corporation between acquisition and distribution as a dividend was not taxable income and did not increase the corporation's earnings. This proposition was affirmed in . This was followed in , saying "Furthermore it is settled that the distribution in kind did not result in taxable income or gain to the distributing corporation, General Utilities & Operating Co. * * *, and consequently did not have the effect of increasing its earnings or profits.
This item of the Commissioner's determination is reversed.
Decision will be entered under Rule 50.