*2075 Where a corporation organized on January 1, 1923, pays a dividend on May 22, 1923, in excess of the amount of its earnings to that date, to the extent of the excess the stockholders have not received dividends within the meaning of section 201(a) of the Revenue Act of 1921, and this excess should be applied in accordance with section 201(c). This is so regardless of the fact that the corporation resulted from the consolidation of two predecessor corporations thereafter dissolved, which had earnings accumulated since February 28, 1913, more than sufficient to pay this balance of the dividend.
*323 The Commissioner determined deficiencies in the income-tax liability of the various petitioners for the calendar year 1923 as follows:
| Docket No. 22126, Irving S. Robeson | $802.27 |
| Docket No. 26267, George W. Robeson | 1,186.56 |
| Docket No. 26268, Emma H. Robeson | 110.18 |
| Docket No. 26269, Robert H. Robeson | 119.40 |
Each petitioner alleges that the Commissioner erred in holding that certain amounts received were taxable as dividends. The Commissioner*2076 *324 admitted that Irving S. Robeson was erroneously charged with the receipt of $1,989.56 as distribution from the estate of M. M. Robeson, deceased, which amount was not received by this petitioner. The cases were consolidated.
FINDINGS OF FACT.
The petitioners are all individuals residing in Rochester, N.Y.
On December 31, 1922, two New York corporations, Rochester Stamping Co. and the Robeson Cutlery Co., ceased doing business and turned over their entire assets, subject to their liabilities, to a new corporation known as Robeson-Rochester Corporation. The two old corporations were then dissolved. They had been doing business for a number of years and at the time of the consolidation each had a surplus. The combined surplus was $789,543.26, which amount the new corporation set up on its books as a paid-in surplus. The par value of the capital stock of the new corporation exceeded by $50,000 the total par value of the capital stock of the two previous corporations. This stock was issued to the stockholders of the two predecessor corporations in proportion to their stockholdings in those corporations.
On April 1, 1923, the new corporation paid out $48,775*2077 in dividends. It later declared a dividend in the amount of $102,000 which was paid on May 22, 1923. On that date after deducting the amount of the April 1 dividend from the earnings of the corporation from January 1, 1923, to May 22, 1923, these earnings amounted to $67,784.15. The balance of the $102,000, to wit, $34,215.85 being 33.545 per cent of the total amount, did not constitute earnings of the new corporation.
The amounts received by the four petitioners from this dividend of May 22 were as follows:
| Irving S. Robeson | $23,651 |
| George W. Robeson | 25,673 |
| Emma H. Robeson | 6,588 |
| Robert H. Robeson | 6,978 |
In his determination of the deficiencies the Commissioner included in the income of each of the various petitioners, as taxable dividends, the amount opposite the name of the respective taxpayers in the above table.
The Rochester Stamping Co. and the Robeson Cutlery Co. had undistributed earnings since March 1, 1913, shown in their surplus accounts, more than enough to cover the amount of the dividend.
OPINION.
MURDOCK: The petitioners contend that the Commissioner erred in including in the computation of their respective incomes, the total *325 *2078 amount of the dividends which each received from the Robeson-Rochester Corporation on May 22, 1923, claiming that 33.545 per cent of the total amount was not earnings of the new corporation since January 1, 1923, the date upon which it began business and that such percentage of the total dividends received by each did not represent taxable dividends, but on the contrary should be used to reduce the basis of their stock in the Robeson-Rochester Corporation.
From the statement of the respondent's counsel at the hearing, it appears that there is no question in this case as to any fact and the only question for our consideration is whether or not in view of the fact that the two consolidating companies had earnings since March 1, 1913, more than sufficient to pay the dividend in question, the excess of this dividend over the earnings of the consolidated company since January 1, 1923, is taxable to the distributees as an ordinary dividend.
Section 201 of the Revenue Act of 1921 provides in paragraph "a" that the term "dividend" means any distribution made by a corporation to its shareholders or members out of its earnings or profits accumulated since February 28, 1913. This same*2079 section in paragraph "c" provides that any distribution made by a corporation to its shareholders or members otherwise than out of earnings or profits accumulated since February 28, 1913, or earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.
It is obvious in the present case, that the petitioner's contention is correct. Of the total amount distributed on May 22, 1923, by the Robeson-Rochester Corporation, 33.545 per cent was not out of its earnings or profits accumulated since February 28, 1913, because its earnings to this extent were less than the amount of the dividend. It therefore does not matter that his part of this dividend might have been out of earnings or profits accumulated by the two predecessor companies since February 28, 1913. Furthermore, the Act provides for just such a case as this, and under section 201(c), 33.545 per cent of the total amount received by each distributee is to be applied against*2080 and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.
Reviewed by the Board.
Judgment will be entered in accordance with the foregoing opinion, under Rule 50.