*291 Decision will be entered for the respondent.
In years prior to 1941 the petitioner purchased from some of its stockholders their shares of stock in the corporation which it thereafter carried as treasury stock. It was the policy of the corporation to have its shares owned by persons who were actively connected with the company as officers or employees, and the purchases were made to keep them from falling into the hands of persons not so connected with the corporation. In 1941 it sold some of these shares to its officers and employees at a profit. Held, that the corporation was dealing in its own shares as it might have dealt in the shares of another corporation and that the profit realized represented taxable income.
*251 This is a proceeding for the redetermination of a deficiency in income tax, declared value excess profits tax, and excess profits tax for the calendar year 1941 in the respective amounts of $ 1,734.92, $ 324.68, and $ 1,291.33. The sole issue is whether petitioner realized taxable income on its disposition of some of its stock. The case was submitted upon a stipulation of facts, exhibits, and oral testimony. The facts stipulated are so found. Other facts are found from the evidence.
FINDINGS OF FACT.
Petitioner is an Ohio corporation, with its office and principal place of business in Canton, Ohio. It is engaged in the wholesale paper and general merchandise business. The Federal tax returns of petitioner for the year 1941 were filed with the collector of internal revenue for the eighteenth district of Ohio at Cleveland.
The capital stock tax return filed by petitioner shows that as of June 30, 1941, its outstanding capital stock consisted of 1,022 shares 1 of common of the par value of $ 100 per share. Printed on the face of the certificates of stock was the following*293 restrictive covenant:
In the event the holder of this certificate desires to dispose of the stock represented herein or any part thereof, he shall first offer the same or such part as he desires to dispose of to the stockholders of record at the time of such offer, or should the holder of this certificate be an employee of the company, who, for any reason leaves the employ of the company, then this said certificate shall be offered to the other stockholders of record in the manner herein provided.
Said offer shall be made in writing to the Secretary of the company who shall spread the same upon the records of the company and who shall forthwith mail notices of said offer to all the stockholders of record at their last known place of residence and the stockholders or any of them shall have the option for a period of thirty (30) days from the time of the mailing of such notices in which to purchase and take over said stock or any part thereof at the book value of said stock, at the time said offer is made.
Should the stockholders of record neglect or decline for such period of thirty (30) days, after the mailing of such notices, to purchase said stock, then the owner of this certificate*294 may sell the same or any part thereof to any other party or parties.
During the period from December 1930 to July 1938 petitioner purchased on three different occasions a total of 284 of its own shares from *252 the estates of two deceased officers and one retired employee, as follows: December 1930, 33 shares; December 1937, 183 shares; and July 1938, 68 shares.
At the times the above shares were offered for sale by the holders, pursuant to the restrictive clause, no other stockholder desired to purchase the shares at their book value and petitioner acquired the shares at a negotiated price. The shares so acquired were not canceled, but were held as treasury stock and were not voted, nor were dividends paid thereon so long as so held. In December 1937 twenty of such shares were sold at a negotiated price to petitioner's president to provide corporate funds.
On September 5, 1941, petitioner's board of directors adopted a resolution*295 to set aside approximately $ 20,000 for the purpose of distribution among certain of petitioner's officers and executive employees as compensation for services rendered during the calendar year 1941. Checks aggregating $ 20,550 were drawn and delivered to those officers and employees on December 2, 1941. For the purpose of buying corporate supplies, on December 4, 1941, petitioner sold 103 shares of its treasury stock to certain of these persons at a total price of $ 20,600, which exceeded the cost of such stock to petitioner by the sum of $ 6,981.50. Petitioner credited this amount to its surplus.
The recipients of the December 2 bonus, the amount each received, and the number of shares, with the price thereof, purchased by some of those recipients on December 4 are as follows:
| Bonus | Shares | Purchase | |
| price | |||
| M. Conley, president | $ 5,400 | 44 | $ 8,800 |
| L. J. Meier, secretary | 2,700 | 2 | 400 |
| N. B. Conley | 3,900 | 14 | 2,800 |
| Wm. E. Melchoir | 1,900 | 10 | 2,000 |
| L. A. Meder | 200 | 1 | 200 |
| H. L. Wagener | 200 | 1 | 200 |
| Al. Schaffner | 400 | 2 | 400 |
| R. M. Conley | 2,500 | 14 | 2,800 |
| J. F. Miller | 50 | 0 | 0 |
| A. W. Conley | 2,500 | 14 | 2,800 |
| J. A. Conley | 800 | 1 | 200 |
| Total | 20,550 | 103 | 20,600 |
*296 The payment of these bonuses was absolute and complete on December 2 and had no connection with the stock purchases on December 4.
As of January 1, 1941, the total assets of petitioner were $ 314,452.49, of which $ 254,207.54 were current assets. As of December 31, 1941, its total assets were $ 438,369.91, of which $ 376,808.15 were current assets.
In selling the 103 shares of its capital stock in the taxable year which it had bought in an earlier year, the petitioner dealt in its own shares as it might in the shares of another corporation.
*253 OPINION.
Petitioner sold shares of its own capital stock in the taxable year for a sum which exceeded its cost by the sum of $ 6,981.50. Respondent taxed that amount as income of petitioner. The propriety of that action is the only issue submitted. It is agreed that Regulations 103, section 19.22(a)-16, 2 is valid and controlling. The answer to the question, therefore, turns on whether petitioner, in thus dealing in its own capital stock, was doing so "as it might in the shares of another corporation," or, on the other hand, was effecting a capital adjustment.
*297 The record discloses that petitioner had about 1,000 shares outstanding, all of which had been issued under a restrictive covenant designed to limit the ownership of its stock to those actively engaged in the business of the corporation. The petitioner was not thereby obligated to purchase any of its capital stock. Nevertheless, on at least three occasions, petitioner had acquired an aggregate of 284 (over one-fourth) of its shares by purchase when stockholders having a prior right to do so declined to avail themselves of the privilege. Petitioner in acquiring the stock did not pay its then book value, as the stock certificate provided, but negotiated the price. This stock was not canceled, but was carried as treasury stock. The clear if not the only inference is that it was bought and held for later sale or distribution to its officers and employees. On two separate occasions petitioner actually sold some of these purchased shares -- at negotiated prices. The later sale occurred in 1941. What was the real nature of the transaction? In selling this stock thus acquired, did petitioner deal in it as it would in the stock of another corporation, or did the transaction constitute*298 a capital adjustment under the regulation?
The testimony is that the sale of 20 shares in 1937 occurred merely because petitioner needed or wanted its proceeds. The testimony as to the purpose of the sale in 1941 is of similar import -- to provide funds for the purchase of corporate supplies. But the record also reveals that petitioner's financial condition then was not only good, but relatively liquid. It also appears that even if any actual need for *254 funds did exist, that need was occasioned by the use of its cash in paying the cash bonus of that year. It will be noted that a stock bonus was not paid. The payment of the cash bonus was absolute and unconditional. Two days thereafter, according to the testimony of the secretary of the petitioner, in a transaction wholly unconnected with and separate from the bonus payment, some, but not all, of the bonus recipients bought 103 shares of the treasury stock -- not at book value, but at negotiated prices. The respective amounts of stock so bought bore no relation to the bonus payments received. M. Conley, president of petitioner, received $ 5,400 of the cash bonus and later bought 44 shares of treasury stock for $ 8,800; *299 L. J. Meier, secretary of petitioner, received $ 2,700 of the cash bonus and bought 2 shares of the treasury stock for $ 400; and J. F. Miller, who received $ 50 of the cash bonus, bought none at all. That the field of buyers was intended to be and even was limited to those engaged in the business of the corporation, is not controlling. ; ; certiorari denied, ; ; . As the Eighth Circuit Court of Appeals said in , in affirming , on this point on facts substantially the same as those presented here:
* * * The argument of the taxpayer is that the sale of its own stock to its employees, under a plan adopted by the corporation for the purpose of creating and sustaining employee interest*300 in the affairs of the corporation, is not dealing in its own stock by the corporation, as it might deal in the shares of another corporation. The point is made that the purchase and sale of the shares in another corporation could not satisfy the essential purpose of the employee purchase plan. This, of course, is true but immaterial. The material fact is that the corporation bought and sold its own stock at a profit, dealing, in controlling aspects of the transaction, as it might have dealt with the stock of another corporation. The fact that these profitable sales were made to employees is not alone determinative of the character of the transaction viewed as a whole. We think the transaction clearly within the department's regulations.
Petitioner acquired more than 25 percent of its outstanding stock to sell or distribute to its officers or employees. It did not distribute but actually sold it, as it was bought, at negotiated prices. The price at which the 103 shares were sold in 1941 exceeded the cost of those shares by $ 6,981.50. Contrary to our holding in the situation existing in ; petition*301 for review dismissed Sept. 21, 1943; ; and , upon which petitioner relies, the real nature of the transaction here was not an adjustment of capital. Rather petitioner, in fact, realized a profit. We think the record amply supports our ultimate finding of fact that in selling these 103 shares of its capital stock in the taxable year the *255 petitioner "dealt in its own shares as it might in the shares of another corporation." The gain realized on such sale is taxable as income to the petitioner. 3
*302 Decision will be entered for the respondent.
Murdock, J., concurring: There is a suggestion in this case that the corporation had a plan under which it used its own stock for the purpose of creating and sustaining employee interest in its affairs. However, there is no evidence to show that either the purchase or sale of the stock here in question was made pursuant to that plan. There is, on the contrary, a finding that the sale in 1941 was not made for that purpose, but was made merely for the purpose of providing some additional funds for corporate uses which could have been provided just as well by the sale of other securities. These circumstances distinguish this case from Cluett, Peabody & Co., 3 T.C. 169">3 T. C. 169.
Opper, J., concurring: It is difficult to see how this proceeding can be decided in favor of respondent without expressly overruling . Here, as there, the stock was bought "for later sale or distribution to its officers and employees"; there, as here, it was subsequently sold because the corporation wanted to raise funds by the sale of its capital stock. *303 Yet there we arrived at a conclusion favorable to the taxpayer and here we find for the respondent. Since, however, I am of the opinion that the Cluett, Peabody case was wrongly decided, I agree with the present result.
Footnotes
1. The certificate of stock in evidence shows the authorized capital to be $ 100,000.↩
2. Sec. 19.22(a)-16. 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 transaction is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩
3. ; certiorari denied, ; ;;;;↩; .