*1190 Pursuant to a resolution of the board of directors the petitioner, in 1936, offered to purchase from its three shareholders not to exceed 50 shares of its preferred stock at a price of $450 per share. Two of the stockholders waived their rights under the option, the third accepted the offer and in 1936 sold to the petitioner 38 shares at the price offered. Held that the petitioner is not entitled to a dividends paid credit representing the difference ($13,300) between the issued price of the stock and the price paid in the redemption thereof.
*19 This proceeding is for the redetermination of a deficiency of $2,994.16 in income tax for the fiscal year ended March 31, 1937, of which only approximately $2,600 is in controversy. The petition alleges that the respondent erred in the determination of the deficiency in refusing to grant the petitioner a dividends paid credit for computation of surtax on undistributed profits in respect of the premium paid by the petitioner upon 38 shares of the preferred capital stock of the petitioner retired in 1936.
*1191 FINDINGS OF FACT.
The petitioner is a corporation of the State of New Jersey, organized in September 1920, with its principal place of business at Irvington, New Jersey. It filed its income tax return for the fiscal year ended March 31, 1937, with the collector at Newark.
The authorized capital stock of the petitioner during the fiscal year ended March 31, 1937, consisted of 1,000 shares of preferred capital *20 stock of no par value and 250 shares of common capital stock of a par value of $5 per share, of which the following were issued and outstanding on April 1, 1936:
| Stockholder | Preferred shares | Common shares |
| Wilhelm Forstner | 561 | 50 |
| Walter Forstner | 288 | |
| William Andrae | 32 | 105 |
| Total | 881 | 155 |
The preferred stock of the petitioner was originally issued for and carried on the books of the petitioner at $100 per share and the common stock at $5 per share.
The earned and undistributed surplus of the petitioner, all earned subsequent to the date of the organization of the petitioner in September 1920, as reflected upon its books of account, was $360,958.89 on April 1, 1936, and $373,996.38 on March 31, 1937.
Walter Forstner was associated*1192 with the petitioner as an officer-stockholder from the date of its incorporation through March 31, 1937. Sometime during 1936 he expressed a desire to retire from continuous employment and to sell a portion of the preferred stock owned by him. Minutes of a meeting of the board of directors held on November 28, 1936, read in part as follows:
The President reported that the purpose of the meeting was to consider the advisability of providing for the retirement at this date of not more than 50 shares of the Preferred stock of this Company at a price not in excess of $450.00 per share and to obtain offers from the Preferred stockholders signifying their desire, if any, to offer for retirement their pro rata proportion of Preferred shareholdings; however, not to exceed in the aggregate 50 shares.
Mr. Wilhelm Forstner signified his intention of waiving his rights, as did Mr. William Andrae. Mr. Walter Forstner offered 38 shares at $450.00 per share, and, after consideration, the following resolution was unanimously adopted:
Resolved: That this Company do accept the offer of Walter Forstner presented at this meeting and do purchase for the Company all of said 38 shares of the Preferred*1193 stock owned by said Walter Forstner, payment to be made forthwith in cash $17,100.00.
Under the terms of the above resolution petitioner, on December 7, 1936, acquired from Walter Forstner, then retired, 38 shares of his preferred stock, paying therefor $17,100.
On its books of account the following entry was made by the petitioner:
| Debit | Credit | |
| Preferred Capital Stock (par) | $ 3,800 | |
| Surplus (premium) | 13,300.00 | |
| Cash | $17,100.00 |
*21 No shares other than the 37 shares above referred to were retired by the petitioner within the fiscal year ended March 31, 1937.
OPINION.
SMITH: The petitioner seeks a dividends paid credit pursuant to the provisions of section 27(f) of the Revenue Act of 1936. This section provides:
(f) DISTRIBUTIONS IN LIQUIDATION. - In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.
Section 27(g) provides, however:
(g) PREFERENTIAL DIVIDENDS. - No dividends paid credit shall*1194 be allowed with respect to any distribution unless the distribution is pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class.
Respondent contends that the credit claimed is not allowable because the distribution involved was preferential within the meaning of section 27(g). The petitioner contends that the distribution was not preferential because of the waiver of rights by the stockholders to whom no distribution was made. In ; affd., , section 27(g) was held to be a limitation upon section 27(f). Upon the authority of that case, we must sustain the respondent in his disallowance of the dividends paid credit to the petitioner in this proceeding. Cf. .
Decision will be entered for the respondent.