*918 In 1924 Corporation A exchanged substantially all of its assets for cash and shares of stock of Corporation B. In the same year Corporation A used a part of the cash received from Corporation B in the redemption of a part of its first preferred stock. In 1925 Corporation A redeemed the balance of its preferred stock for cash and shares of Corporation B and all of its second preferred stock for shares of Corporation B. It also distributed to its common stockholders shares of stock of Corporation B in exchange for its common stock outstanding. Held, that the gains received by the first preferred stockholders in 1924 from the redemption of their shares is the difference between the cash received and the cost or other applicable basis to them of the shares of first preferred stock redeemed. Held, further, that the gains realized by petitioner Bessie Blum in the year 1925 from the redemption and exchange of certain shares of first preferred stock is the difference between the amount of cash received plus the stipulated fair market value of the shares of Corporation B likewise received and the cost or other applicable basis of the shares of first preferred stock redeemed.
*580 The respondent has determined deficiencies in petitioners' income tax for 1924 and 1925 as follows:
| Petitioner | Docket No. | Year | Deficiency |
| David Blum | 52220 | 1924 | $4,998.44 |
| Bessie Blum | 52221 | 1924 | 16,474.50 |
| 1925 | 3,180.77 |
The only questions in issue are the amounts of taxable gain realized by the petitioners in 1924 and 1925 from the redemption and exchange by them of certain shares of stock in the Great Western Smelting & Refining Co. for which they received cash in 1924, and for which Bessie Blum received cash and shares of stock of another corporation in 1925.
FINDINGS OF FACT.
On January 1, 1924, and for more than two years prior thereto, David Blum was the owner of 5,185 shares of first preferred stock, *581 7,670 shares of second preferred stock and 15,342 shares of common stock in the Great Western Smelting & Refining Co. (hereinafter sometimes referred to as Great Western), an Illinois corporation. On the same date, and for more than two years prior thereto, Bessie Blum*920 was the owner of 6,000 shares of first preferred stock of the same company.
Great Western was engaged in the manufacture and sale of nonferrous metals at Chicago, Illinois, and other cities. Its capitalization in 1924 was represented by the following:
36,000 shares first preferred, par value $100 per share;
32,000 shares second preferred, par value $100 per share;
70,000 shares common stock, par value $10 per share.
The first preferred stock certificates provided for 7 percent cumulative dividends prior to the payment of any dividends on the second preferred and common stock and, in the event of liquidation and winding up of the affairs of the company, the first preferred stock was to be retired prior to any retirement of the second preferred or common stock.
On May 16, 1924, David Blum and one Ivan Reitler, representing the stockholders of Great Western, entered into a contract with the representatives of several other corporations and partnership engaged in the manufacture and sale of nonferrous metals wherein it was agreed that the business of the several separate interests should be combined and taken over by a new corporation to be organized under the laws of Delaware, *921 which new company took the name of Federated Metals Corporation (hereinafter sometimes referred to as Federated Metals). Great Western was to transfer all of its assets, with certain minor exceptions, to the new company in exchange for cash and shares of stock in the new company and the assumption by the new company of practically all of the liabilities of Great Western.
On May 31, 1924, notice was sent to the stockholders of Great Western by its president, Ivan Reitler, in form and words as follows:
You are hereby notified that a special meeting of the Stockholders of GREAT WESTERN SMELTING & REFINING COMPANY, * * * will be held at the offices of said Company * * * on the 12th day of June, A.D., 1924, at 10 o'clock a.m., for the purpose of considering and voting on the proposition to exchange and transfer to Federated Metals Corporation * * * all of the assets and properties of every kind and character of GREAT WESTERN SMELTING & REFINING COMPANY, with the exception of balances due by officers and employees * * * the terms and conditions of such exchange and transfer, and all propositions, matters or questions which may be incidental or relevant thereto, and the liquidation*922 (partial or complete) in pursuance of the plan of reorganization of GREAT WESTERN SMELTING & REFINING COMPANY.
*582 On June 12, 1924, the stockholders and directors of Great Western met at Chicago, and passed a resolution which recited the terms of the contract of May 16, 1924, and its subsequent modification in minor respects, and at that time approved the contract and authorized the transfer of the assets of Great Western to Federated Metals. This resolution provides in part as follows:
WHEREAS, this special meeting of the stockholders of Great Western Smelting & Refining Company was duly called for the purpose of considering and voting on the proposition to exchange and transfer to Federated Metals Corporation (or whatever other name may be adopted), a corporation to be organized under the laws of the State of Delaware (or such other state as may be determined upon), all of the assets and properties of every kind and character of Great Western Smelting & Refining Company, with the exception of balances due by officers and employees and its interest in the Sociedade Anonyma Marvin of Brazil, South America, and the terms and conditions of such exchange and transfer and*923 all propositions, matters or questions which may be incidental or relevant thereto, and the liquidation (partial or complete), in pursuance of the plan of reorganization, of the Great Western Smelting & Refining Company:
* * *
IT IS FURTHER RESOLVED That in liquidation the cash to be received from Federated Metals Corporation under the provisions of said contract of May 16, 1924, as thus modified by said letters, be used to redeem first preferred stock on the basis upon which this company is entitled to redeem the same, and that as soon as all of such money to be paid to this company by Federated Metals Corporation is received by this company, this company call in as much of its first preferred stock as may be thus redeemed and that the distribution of the stock to be received from said Federated Metals Corporation and of all the other assets of this company available for distribution in liquidation be determined upon as promptly as possible after the requirements and necessities of this company and the amount available for distribution to each stockholder have been accurately determined.
Federated Metals was incorporated under the laws of the State of Delaware on June 10, 1924, with*924 an authorized capital stock of 400,000 shares without par value, of which only 250,712 shares were issued under the terms of the contract of May 16, 1924. This corporation was organized to, and did, acquire substantially all of the assets of Great Western and the assets of a partnership and certain other corporations pursuant to the contract of May 16, 1924, as modified.
Immediately after June 12, 1924, Federated Metals acquired in accordance with the agreement of May 16, 1924, all of the assets of Great Western, except the balances due by officers and employees, totaling $89,309.50, and its interests in the Sociedade Anonyma Marvin of Brazil, South America, totaling $50,000. For its assets thus transferred to Federated Metals, Great Western received during 1924 cash of $1,078,813 and 104,943 shares of common stock, no par *583 value, of Federated Metals on October 1, 1924, and due to adjustment under the contract of May 16, 1924, it subsequently received on November 11, 1926, 131 additional shares of common no par value stock of Federated Metals.
The minutes of a special meeting of the board of directors of Great Western held June 12, 1924, provide in part:
IT IS*925 FURTHER RESOLVED That in liquidation the cash to be received from Federated Metals Corporation under the provisions of said contract of May 16, 1924, as thus modified by said letters, be used to redeem first preferred stock on the basis upon which this company is entitled to redeem same, and that as soon as all of such money to be paid to this company by Federated Metals Corporation is received by this company, this company call in as much of its first preferred stock as may be thus redeemd and that the distribution of the stock to be received from said Federated Metals Corporation and of all the other assets of this company available for distribution in liquidation be determined upon as promptly as possible after the requirements and necessities of this company and the amount available for distribution to each stockholder have been accurately determined.
Pursuant to such resolution Great Western, on September 18, 1924, used $908,992 in the redemption of a portion of its preferred stock. Likewise, on May 22, 1925, Great Western redeemed the balance of its first preferred stock, using $169,476 cash and 64,337 shares of Federated Metals common stock for such purpose. On the same*926 date it used 36,189 shares of Federated Metals common stock in retirement of all its outstanding second preferred stock. It also exchanged certain shares of Federated Metals common stock for the outstanding shares of its own common stock. The first and second preferred stock was canceled at the time it was retired. The common stock was surrendered to the corporation in 1925, but was not canceled.
On September 18, 1924, David Blum received in redemption and retirement of 1,452 shares of his first preferred stock in Great Western $162,624 in cash, representing $110 per share plus $2 per share accumulated dividends. On the same date Bessie Blum received in redemption and retirement of 1,680 shares of her first preferred stock in Great Western $188,160 in cash, representing $110 per share plus $2 per share accumulated dividends.
On May 22, 1925, David Blum received (a) in redemption and retirement of 261 shares of his first preferred stock in Great Western $30,283 in cash, representing $110 per share plus $6 per share accumulated dividends; (b) in redemption and retirement of 3,472 shares, the balance of his first preferred stock in Great Western, and in redemption and retirement*927 of all his second preferred stock and in exchange for his shares of common stock 23,242 shares of Federated Metals common stock on which a value of $31.50 per share was placed *584 by the respondent in determining the tax shown in the 60-day letter issued to David Blum. On the same date Bessie Blum received (a) in redemption and retirement of 302 shares of first preferred stock in Great Western $35,032 in cash, representing $110 per share plus $6 per share accumulated dividends; (b) in redemption and retirement of 4,018 shares, the balance of her first preferred stock in Great Western, 13,316 shares of Federated Metals common stock, on which a value of $31.50 was placed by the respondent in determining the tax shown in the 60-day letter issued to Bessie Blum.
Great Western distributed ratably to its holders of second preferred and common stock in 1930 cash in the amount of $30,408.13. The company has continued its corporate existence up to the present time because of certain outstanding liabilities and claims.
The 1924 income tax case of Great Western was closed by the respondent and the company under a final closing agreement during the year 1926 without recognition*928 of any taxable profit to Great Western from the exchange of its assets in 1924. Both the respondent and the company took the position at that time that the transaction, in so far as the company was concerned, involved a reorganization followed by a distribution of the property and money received in pursuance of the plan of reorganization and therefore any gain from the exchange was not to be recognized as subject to tax in the hands of Great Western.
The basis provided by section 204 of the Revenue Acts of 1924 and 1926 for determining gain or loss (after adjustments, if any, as required by section 202 thereof) from the sale or other disposition of the first preferred stock of Great Western owned by David Blum and redeemed and canceled in 1924 and 1925 was $38.755 per share, and of that owned by Bessie Blum, $97.12014 per share.
One share of second preferred stock and two shares of common stock of Great Western constituted a unit of stock, with the result that the basis provided by section 204 of the Revenue Acts of 1924 and 1926 for determining gain or loss from the sale or other disposition of a unit of the second preferred and common stock of Great Western by David Blum is*929 $25.8333 per unit.
The fair market value of Federated Metals common stock on May 22, 1925, was $30 per share.
The method of determining the deficiency in the case of David Blum for 1924 is shown in the deficiency notice attached to the petition as follows:
Reference is made to the report of the internal revenue agent in charge at Chicago, Illinois, to your protest submitted under date of May 10, 1928, and to the conference held in this office on May 20, 1929.
The adjustments recommended in the report have been approved with the following exception:
*585 It is held by this office that the transaction involving the transfer of the assets of the Great Western Smelting and Refining Company to Federated Metals, Incorporated and the dissolution of the former company represented a reorganization within the meaning of section 203(h)(1)(A) of the Revenue Act of 1924, the plan of which was not completed at least until May 22, 1925.
Therefore, for your stock in the Great Western Smelting and Refinding Company you received cash and stock of a corporation, a party to a reorganization and since the actual gain in the exchange exceeded the money received, the amounts of $164,624.00*930 received in 1924 and $30,283.00 received in 1925 constitute taxable income in those years, respectively.
| 1924 | ||
| Capital net gain shown on return | $162,799.78 | |
| Amount reported from above transaction | $124,645.49 | |
| Correct amount | 164,624.00 | |
| 39,978.51 | ||
| Capital net gain, adjusted | $202,778.29 | |
| Computation of Tax | ||
| Ordinary net income, correct as reported on return | $39,165.49 | |
| Less: | ||
| Dividends | $32,288.25 | |
| Personal exemption and credit for dependents | 2,900.00 | |
| 35,188.25 | ||
| Net income subject to normal tax | $3,977.24 | |
| Normal tax at 2% on $3,977.24 | 79.54 | |
| Surtax on $39,165.49 | 1,931.51 | |
| Tax at 12 1/2% on $202,778.29 | 25,347.29 | |
| Total | $27,358.34 | |
| Less: Earned income credit | 19.88 | |
| Tax liability | $27,338.46 | |
| Tax previously assessed | 22,340.02 | |
| Deficiency | $4,998.44 |
The deficiency in the case of Bessie Blum for 1924 was computed by the respondent as follows:
Therefore, for your stock in the Great Western Smelting and Refining Company you received cash and stock of a corporation a party to a reorganization and since it is held that the preferred stock exchanged by you had a total cost basis of $407,460.00 which was less than the total*931 cash received in the transaction, the cash is taxable income in the years in which received.
| 1924 | |
| Capital net gain from above transaction shown on return | $56,364.00 |
| Increase in profit realized | 131,796.00 |
| Capital net gain | 188,160.00 |
| Computation of Tax | |
| Ordinary net income correct as reported in return | $24,381.43 |
| Less: Dividends | 21,000.00 |
| Net income subject to normal tax | 3,381.43 |
| Normal tax at 2% on $3,381.43 | 67.63 |
| Surtax on $24,381.43 | 466.70 |
| Tax at 12 1/2% on $188,160.00 | 23,520.00 |
| Total | $24,054.33 |
| Less: Earned income credit | 30.00 |
| Tax liability | 24,024.33 |
| Tax previously assessed | 7,549.83 |
| Deficiency | $16,474.50 |
*586 OPINION.
SMITH: The questions in issue in these proceedings are:
(1) The amounts of gain realized by petitioners in 1924 from the redemption of certain shares of first preferred stock of the Great Western Smelting & Refining Co.
(2) The amount of taxable gain realized by Bessie Blum in 1925 from the redemption of the balance of her holdings of first preferred stock of the Great Western Smelting & Refining Co. for cash and stock of the Federated Metals Corporation.
In their income tax returns*932 for 1924 David Blum reported a rofit of $124,645.49 from the redemption of 1,452 shares of first preferred stock of Great Western and Bessie Blum a profit of $56,364 from the redemption of 1,680 shares of first preferred stock of the same company. In her income tax return for 1925 Bessie Blum reported a profit of $11,368.10 from the redemption of 302 shares of first preferred stock of Great Western, but did not report any gain or loss from the redemption of the balance of her holdings of first preferred stock of that company for shares of stock of Federated Metals.
The contention of the petitioners in these proceedings is that there was a partial liquidation of Great Western in 1924 and that they are liable to income tax in respect of the profits which they received upon such liquidation; that the basis for the computation of that profit under section 204 has been stipulated and that the amount of their gains is the excess of the cash received over the cost to them of the shares redeemed. The respondent's contention, on the other hand, is that, pursuant to a reorganization, Great Western in 1924 distributed cash to its shareholders and that under section 203(d)(1) of the Revenue*933 Act of 1924 account must be taken of distributions to the shareholders in 1925 as well as in 1924 in the determination of the gain realized by the petitioners in 1924; that upon such *587 computations all of the cash received by the petitioners in 1924 from the redemption of their first preferred shares constitutes taxable income to them in that year.
With respect to the tax liability of Bessie Blum for 1925, the respondent contends that she realized a taxable profit in 1925 of the total amount of cash received in that year on the redemption of the balance of her first preferred stock.
From an analysis of the Revenue Act of 1924 it will be noted that section 201 is concerned with the method of computing gains and losses from "distributions by corporations." Subdivisions (c) and (g) provide:
(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized*934 only to the extent provided in section 203. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
* * *
(g) 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.
Section 202 is concerned with the "DETERMINATION OF AMOUNT OF GAIN OR LOSS" from the sale or other disposition of property. Section 203 is concerned with the "RECOGNITION OF GAIN OR LOSS FROM SALES AND EXCHANGES." The pertinent provisions of this section are as follows:
SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, *935 determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * *
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
* * *
(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property *588 received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(2) If a distribution made in pursuance of a plan of reorganization*936 is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, them there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.
(e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then -
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange * * *.
Section 204 provides the "BASIS FOR DETERMINING GAIN OR LOSS, DEPLETION, AND DEPRECIATION." It is unnecessary to discuss the provisions of this section since the parties have stipulated the basis for the*937 computation of the gains received by petitioners in the taxable years.
So far as the year 1924 is concerned we need concern ourselves only with the applicability of section 203(d) of the Revevue Act of 1924. The respondent contends that inasmuch as Great Western distributed most of the cash which it received from Federated Metals in 1924 to the first preferred stockholders of Great Western in redemption of a part of their shares, Great Western was not liable to income tax under section 203(e)(1). The assumption is then made that inasmuch as the first preferred stockholders received the cash distributed they must be liable to income tax upon a different basis from that which would apply if there had been no reorganization of Great Western.
Even if the redemption of the first preferred stock in 1924 might be regarded as a distribution pursuant to a reorganization of Great Western, it does not follow that the distributions made by Great Western to its stockholders in 1925 have a bearing upon the computation of these petitioners' incomes for 1924. Manifestly, these petitioners may not be held liable to income tax in 1924 in respect of amounts which were distributed to them in*938 1925. Under section 203(d)(1) a taxpayer is not liable to income tax except upon "property received." These petitioners received cash in 1924 in exchange for certain shares of first preferred stock of Great Western. Clearly *589 they parted with something in 1924. What they parted with cost them something. The basis for the computation of the gain realized by the petitioners in 1924 from the redemption of their preferred stock has been stipulated. The petitioners are not denying that they are liable to income tax for 1924 in respect of the profits realized by them from the redemption of their preferred stock in that year. We are of opinion that the claim of the respondent that the petitioners realized profits in excess of that amount is without merit.
It will be noted from our findings that it has been stipulated that a portion of the amount received by the petitioners in 1924 from the redemption of their shares represents a dividend by Great Western. Apparently the petitioners and the respondent have treated the entire amount received by each petitioner as a distribution in redemption of the shares. The record does not show whether a portion of the amount received*939 equivalent to $2 per share of stock redeemed represents a dividend paid out of earnings accumulated by Great Western subsequent to February 28, 1913. The petitioners have alleged no error on the part of the respondent in treating the entire profit received by them on the redemption of their shares as consisting of capital gain. In the absence of evidence upon the point or any allegation of error in respect thereto we do not pass upon the question as to whether the stipulated amount of $2 per share represents a dividend paid out of earnings accumulated subsequent to February 28, 1913.
So far as the tax liability of Bessie Blum is concerned for 1925, it appears that in 1925 she exchanged the balance of her first preferred shares in Great Western for cash and shares of stock of Federated Metals. Upon the facts in this case it is immaterial whether the deficiency be computed under section 201 of the statute or under section 203(d)(1), for if computed under the last named section the profit which she realized was less than the amount of cash received. We therefore find it unnecessary to determine whether the cash and shares of Federated Metals turned over to her in 1925 in redemption*940 of her first preferred shares represented a distribution pursuant to a reorganization of Great Western or not. Since the evidence does not show whether the dividend of $6 per share received on the shares redeemed in cash was from earnings accumulated by Great Western subsequent to February 28, 1913, and since there is no allegation or error upon the point, it is unnecessary for us to pass upon the question of the correctness of the treatment accorded the item by the petitioner and by the respondent.
Reviewed by the Board.
Judgment will be entered under Rule 50.
GOODRICH dissents.