*278 Decision will be entered under Rule 50.
In 1947 the petitioner sold to its president 14,754 shares of its capital stock which it held as treasury stock. The sale was made pursuant to petitioner's acceptance of a written offer from its president wherein he warranted that he was purchasing the stock for investment and not for resale. A small portion of the shares sold is traceable to stock originally acquired by petitioner as a part of a purchase of its stock for distribution as additional compensation to its officers and key employees. The remainder of the shares is traceable to stock in another corporation which petitioner acquired many years before under a merchandise purchase agreement. Held, that in the sale to its president the petitioner was not dealing in its shares as it would in the shares of another corporation and that it did not realize taxable gain on the transaction.
*769 The Commissioner has determined a deficiency of $ 68,541.52 in petitioner's income tax for the fiscal year ended June 30, 1948. The deficiency results from several adjustments made by the Commissioner *770 in the income tax return filed by petitioner. The only adjustment contested by the petitioner is the Commissioner's determination that petitioner realized a taxable gain on the sale of 14,754 shares of its common stock.
FINDINGS OF FACT.
Some of the facts are stipulated and are found as stipulated.
The petitioner was incorporated under the laws of Ohio in 1909. Its principal office and place of business is in Detroit, Michigan. It filed its Federal income tax return for the fiscal year 1948 with the collector of internal revenue for the district of Michigan.
Petitioner is engaged in the manufacture and sale of axles, transmissions, power take-offs, heating equipment, air conditioning equipment, oil burners, steam and hot water heating plants, *280 and gas heating equipment.
Prior to 1935 the Bossert Corporation of Utica, New York, hereinafter referred to as Utica, manufactured and sold substantial quantities of sheet metal stampings to petitioner. In 1935, Utica had financial difficulties and considered filing a petition for reorganization under section 77B of the Federal Bankruptcy Act and, under and pursuant to that act, thereafter proposing a plan of reorganization which would provide for the readjustment of the rights of its creditors and stockholders. Under date of February 28, 1935, Utica addressed a letter to petitioner containing the following offer:
If a plan of reorganization is consummated along the lines outlined in the memorandum or if any other capital structure and financial set-up substantially as set forth in the memorandum, then, conditioned upon and coincident with there being issued or transferred to you 1,000 fully paid and non-assessable shares of the Class "A" Common Stock of the new company, to be organized pursuant to said plan, or one-fourth of all the authorized common stock of the new Company, however designated, but which shall not be subjected to accumulated dividends on preferred stock, you *281 would enter into a contract with the new company, under which you would agree to purchase from the new company your requirements of sheet metal stampings, for a period of five years, provided the prices quoted by the new company are as low, or lower, than those quoted by reliable and responsible competitors of the new company, the new company, on the other hand, to agree to sell you your said requirements during the period of such contract at such prices and rebate to you by credit in the amount set forth in the schedule hereto attached, as the dollar volume reaches the amounts shown.
The offer was accepted by petitioner subject to the following postscript appended in longhand to said acceptance:
Pending reorganization as above this arrangement as to sales will apply between you and our present Company. This arrangement also includes Pittsburgh Equitable Meter Company and any affiliated or subsidiary company of either Timken or Pittsburgh Meter, and sales or [sic] all said companies are to be included in total sales set forth in the said attached memorandum.
*771 Thereafter, and subsequent to February 1935, Utica filed a petition for reorganization under section 77B of the*282 Federal Bankruptcy Act and, in the proceedings resulting therefrom, a plan for its reorganization was proposed, confirmed, and became effective.
Pursuant to the plan of reorganization, the Bossert Company, Inc., a New York corporation, hereinafter referred to as Bossert, was organized under the laws of New York and Utica conveyed to Bossert certain of Utica's property and assets subject to certain of Utica's liabilities.
On June 28, 1935, Bossert and petitioner entered into a formal agreement which embodied the terms contained in Utica's above mentioned offer of February 28, 1935, and petitioner's acceptance thereof. Thereupon Bossert issued 1,000 shares of its common stock to petitioner and petitioner paid Bossert $ 100.
Upon acquisition of the 1,000 shares of stock in Bossert, petitioner debited an account on its books, entitled "Investment In Common Stock of The Bossert Company, Inc.," with the amount of $ 100 and credited an account, entitled "Cash" with a like amount. Thereafter, and until December 20, 1946, petitioner continued to carry the stock of Bossert on its books of account as an asset.
On June 21, 1946, petitioner and Bossert entered into a plan for their reorganization. *283 The plan was amended on December 20, 1946, and, as amended, provided:
The Bossert Company, Inc. (hereinafter called "Bossert") is a duly organized and existing corporation incorporated under the laws of the State of New York, with its principal office and place of business located in the City of Utica in said State of New York. The Timken-Detroit Axle Company (hereinafter called "Timken") is a duly organized and existing corporation incorporated under the laws of the State of Ohio, with its principal office located in the City of Canton in said State of Ohio.
It is proposed that a reorganization be effected between Bossert and Timken as provided below and that the following be done and effected pursuant to this Plan of Reorganization:
1. Bossert will transfer, assign, convey and set over to Timken all of Bossert's assets, property and business subject to all of Bossert's liabilities, indebtedness and obligations and in exchange therefor Timken will deliver to Bossert certificates of Timken's Common Stock, $ 5.00 par value, and having full voting rights, in an amount determined in accordance with the formula attached as Exhibit A to said Plan of Reorganization, as amended, and will*284 assume and agree to pay, satisfy, discharge and perform all of Bossert's said liabilities, indebtedness and obligations.
2. Bossert will thereupon proceed forthwith to dissolve and distribute its assets, which except for a possible small amount of cash will consist entirely of Timken stock, to its shareholders in exchange for shares of Bossert stock then issued and outstanding, in accordance with the relative priorities and preferences thereof.
3. Bossert and Timken will take any and all steps and proceedings necessary or proper to carry out this Plan of Reorganization, and to provide for any possibilities or eventualities which may arise in carrying through to a successful *772 conclusion as expeditiously as possible each of the various steps included in this Plan of Reorganization.
4. Bossert and Timken are parties to the reorganization provided for herein.
The Boards of Directors of Bossert and Timken have approved this Plan of Reorganization. The consummation of this Plan of Reorganization is subject to approval thereof by shareholders of Bossert in a number deemed adequate and sufficient by Bossert's Board of Directors, and is subject also to the execution and delivery *285 by Bossert and Timken of a formal written agreement satisfactory in form and substance to both Bossert and Timken providing for the consummation of the foregoing and containing such protective provisions as each shall deem necessary or proper in the circumstances.
Pursuant to the plan of reorganization, the petitioner, on December 20, 1946, issued 88,942 shares of its authorized, but previously unissued, common stock of a par value of $ 5 each to Bossert. Thereupon Bossert distributed all of its assets, which consisted entirely of the foregoing shares of stock in the petitioner and a small amount of cash, to its stockholders in exchange for all of its capital stock then outstanding. In connection therewith the petitioner surrendered to Bossert the 1,000 shares of common stock in Bossert, which petitioner had acquired during, and held since, June 1935, and received in exchange therefor 14,500 shares of its own common stock of a par value of $ 5 each and $ 5.01 in cash. Upon receipt of this stock, the petitioner debited a treasury stock account on its books with $ 72,500 and credited the capital surplus account and the account designated "Investment in Bossert Stock" with the amounts*286 of $ 72,400 and $ 100, respectively.
At a special meeting of the board of directors of the petitioner held November 25, 1936, a resolution was adopted authorizing the officers of the corporation to sell, assign, and transfer any or all of the petitioner's common stock held in the treasury. A like resolution was adopted at a special meeting of the board of directors on December 5, 1939.
For a number of years prior to 1940 the petitioner had issued to its officers or employees as bonus or additional compensation shares of its own stock held in its treasury. At a special meeting of the petitioner's board of directors, held on May 9, 1940, and at a time when petitioner held 2,021 shares of its own common stock of a par value of $ 10 each in its treasury, the treasurer of the petitioner was authorized to purchase 2,000 additional shares of common stock of the same par value in the open market at a price not to exceed $ 24 per share, and when acquired to hold it in the treasury "with the intention of having it available for distribution as compensation to officers and employees of the Company." Thereafter, in May 1940, the petitioner purchased on the open market 2,000 shares of its common*287 stock of a par value of $ 10 each at a cost of $ 43,898. Petitioner's treasury stock account was debited with the amount of the par or stated value of the stock, $ 20,000, the capital surplus account was debited with $ 23,898, and the *773 cash account was credited with $ 43,898. On June 4, 1940, the petitioner's board of directors authorized the accumulation of a special reserve fund from which additional compensation to its officers and key employees might be awarded. The executive committee of the board of directors was empowered to determine those to whom additional compensation should be awarded and to determine the amount and manner of such payments. On November 16, 1940, and at a time when petitioner had 4,021 shares of its common stock, par value $ 10 each, in its treasury, the executive committee designated three officers of petitioner to receive additional compensation for 1940 and directed that payment thereof be made by the issuance to them of 3,900 shares of petitioner's common stock of a par value of $ 10 each out of such stock then held by petitioner as treasury stock. The 3,900 shares were issued to the officers on December 7, 1940. Of the shares so issued, *288 1,879 had been purchased on the open market in May 1940, thus leaving as treasury stock 121 shares of that purchase with a cost of $ 2,371.43. On June 11, 1946, the par value of petitioner's common stock was reduced from $ 10 per share to $ 5 per share and the remaining 121 shares of the former par value were exchanged for 242 shares of the par value of $ 5 per share. On December 27, 1946, the 242 shares were increased to 254 shares as a result of the payment by petitioner of a stock dividend of 5 per cent. None of its shares purchased by petitioner or received upon dissolution of Bossert were ever carried on its books or shown in its balance sheets as an asset.
In May 1947, petitioner's board of directors began the discussion of ways and means for inducing its president, Walter F. Rockwell, hereinafter referred to as Rockwell, to continue in petitioner's employ for an extended period in the future. As a result of these discussions, Rockwell, on October 23, 1947, submitted to petitioner a written offer to purchase from the petitioner, for cash, 14,754 shares of its common stock at the closing price of the stock on the New York Stock Exchange on October 28, 1947. In his offer *289 Rockwell stated: "I hereby warrant and represent to you that I am purchasing the shares to which this offer relates for investment and not re-sale." The offer was accepted by petitioner on October 28, 1947. Pursuant to the offer and acceptance, the petitioner, on October 29, 1947, sold and issued to Rockwell 14,754 shares of its common stock for $ 276,637.50, or at $ 18.75 per share.
Rockwell has been a director of petitioner since 1933 and also has held the following offices: Vice president from 1933 to 1940; secretary in 1936 and 1937; president from 1940 to the present time.
Of the 14,754 shares of stock which petitioner sold to Rockwell on October 29, 1947, 254 shares are traceable to 121 shares of petitioner's common stock, $ 10 par value, included in the 2,000 shares of such common stock acquired by petitioner by purchase in the open market in *774 May 1940. The remaining 14,500 shares were shares received by petitioner upon the dissolution of Bossert. The purpose of the sale by petitioner to Rockwell of its stock was to induce Rockwell to continue in its employ for an extended period in the future.
Although petitioner sold original issues of its stock to its employees*290 on July 28, 1916, January 27, 1923, March 8, 1927, and February 20, 1928, it did not prior to the sale here in issue sell any of its treasury stock to its employees or to anyone else. The petitioner never acquired any of its stock as an investment or for the purpose of making a profit on its resale.
In its income tax return for the fiscal year ended June 30, 1948, the petitioner did not report any amount as capital gain realized from the sale of the 14,754 shares of its stock to Rockwell. Respondent determined that the shares had a cost basis of $ 2,471.43 and that petitioner realized a profit of $ 274,166.07 from the sale.
The petitioner in acquiring and later selling its own shares here in question was not dealing in those shares as it would in the shares of another corporation.
OPINION.
The only issue for determination is whether under the circumstances presented the petitioner realized taxable gain on the sale of 14,754 shares of its own capital stock to its president in 1947. The respondent's regulations relating to dealings by a corporation in its own capital stock are set out below. 1
*291 The respondent takes the position that in its dealings in its own shares here involved the petitioner has dealt as it might in the shares of another corporation, and that the gain realized from the sale of the shares in question was taxable. In support of his position, he contends that unless a corporation's dealings in its own stock effect a change in its capital structure, the resulting gain is taxable and that the purpose behind such dealings is of less importance than the results thereof.
*775 In , petition to review dismissed (C. A. 5, Sept. 21, 1943), we were called upon to determine whether the taxpayer had realized taxable gain from certain dealings in its own shares. After discussing certain cases, we there said:
We view these decisions as establishing the propositions, first, that whether a corporation's dealings in its own stock result in tax consequences to the corporation depends upon the character and purpose of the purchase and of the sale and their relationship to each other; second, that if their true nature is a readjustment of capital, no taxable gain or loss occurs even though the*292 result is more than a mere bookkeeping process and the outcome may in a real sense be a benefit or detriment to the corporation's economic position; and, third, that one test of the true nature of the transaction is whether the corporation has dealt in its stock in the same way that it would in the stock of another corporation. * * *
Since the respondent's regulation provides that whether a given acquisition or disposition by a corporation of its own shares gives rise to taxable gain "depends upon the real nature of the transaction," a consideration of the foregoing enumerated factors is requisite to a determination of the nature of the transaction. ; . Where the corporation's dealings in its shares were pursuant to an agreement to effect permanent equal division of stock control, the nature of the transaction was not such as to give rise to taxable gain. Nor was the nature of the dealings such as to give rise to taxable income where, upon the withdrawal of a stockholder, *293 the corporation, with the consent of the other stockholders, acquired his shares by distributing to him a ratable portion of net assets and, thereafter, the stock was reissued, in payment on indebtedness, to another stockholder who had made a loan to the corporation. In , the corporation in a prior year acquired certain shares of stock as a step in an employee profit sharing plan which had not been carried out. During the taxable year the corporation disposed of to its stockholders the foregoing shares among new shares in a readjustment of its capital structure. The real nature of the disposition of all the shares was held to be a means of procuring additional capital and not such a transaction as gave rise to taxable gain.
The shares involved in each of the foregoing cases were held as treasury stock and the corporations' dealings therein in nowise resulted in any change of the capital structures of the respective corporations, a requisite which the respondent contends herein is essential to a holding that resulting gain from such dealings is not taxable.
*294 Of the 14,754 shares of petitioner's stock involved herein, 254 shares are traceable to shares originally acquired by petitioner in 1940 as part of a purchase of its stock for distribution as additional compensation to its officers and key employees, as had been its practice for several *776 years prior thereto. The remaining 14,500 shares are traceable to 1,000 shares of stock which petitioner acquired in Bossert in 1935 in consideration of a payment of $ 100 and petitioner's agreement to purchase from Bossert, at competitive prices, for a period of 5 years the sheet metal stampings requirements of itself and certain named subsidiaries. However, petitioner actually acquired said 14,500 shares of its stock as a result of the reorganization of itself and Bossert in 1946 and the dissolution of the latter as a part of the reorganization. Several months prior to the sale of the 14,754 shares of its stock the petitioner's board of directors began discussion of ways and means to induce petitioner's president, who had been in the employ of petitioner since 1933 and its president since 1940, to continue in its employ for an extended future period. As a result of the discussions, *295 the president offered to buy, and petitioner sold to him, its shares. Viewing the situation here in the light of the holdings in the cases mentioned above, we have concluded, contrary to respondent's contention, that in acquiring and disposing of the shares in question the petitioner was not dealing in its own shares as it would those of another corporation. In our view the real nature of the transactions was to provide petitioner's officers and key employees with increased proprietorship interests in the petitioner with a view to the retention of their services, and in the case of the president to the retention of his services for an extended future period.
Furthermore, as a part of his offer to purchase the shares in question, petitioner's president warranted that he was purchasing such shares for investment and not for resale. Upon petitioner's acceptance of the offer, the president became bound by his warranty. Consequently, upon acquiring the shares, he could not, without breach of his warranty, thereupon use them for the purpose of resale. Under the warranty his use of them was restricted to investment purposes. The foregoing restrictions serve to distinguish the situation*296 here from that presented in . In that case there was no restriction whatever as to the use that might be made of the shares involved. , affd. , is distinguishable from the instant case on the same ground. So far as shown the purchasers in that case were free to use their shares for any purpose they might wish.
In view of what has been said above, we hold that petitioner did not realize any taxable gain on the sale of its shares to its president.
In reaching the foregoing conclusion we have considered the cases relied on by respondent, including ; ; and also , in which views *777 contrary to those taken herein were expressed and our holdings therein were reversed. With due deference to those*297 views, we feel that the position here taken is proper on the situation presented.
Decision will be entered under Rule 50.
Footnotes
1. Regulations 111, section 29.22 (a)-15, provides:
Acquisition or Disposition by a Corporation of Its Own Capital Stock. -- Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩