*105 Decision will be entered for the respondent.
Petitioner sold various corporate stocks to a stockholder owning more than 50 percent of its stock. Held, on the facts, that the sale was not indivisible and that the Commissioner did not err in applying section 24 (b) (1) (B) of the Internal Revenue Code and disallowing losses on some of the stocks while taxing gain upon others. Held, further, that petitioner, a personal holding company, is subject to personal holding company surtaxes, though having a deficit at the beginning and end of the taxable year.
*583 The Commissioner determined against the petitioner, for the calendar year 1941, a deficiency in income tax in the amount of $ 6,965.89, and a deficiency of $ 13,301.67 in personal holding company surtax. Both amounts are placed in controversy. The questions presented are: (a) Whether the Commissioner erred in applying section 24 (b) (1) (B) of the Internal Revenue Code and denying deduction of losses upon a portion of the stocks involved in transaction in stock, while adding to petitioner's*106 income the gains from other stock in the same transaction, and (b) whether the petitioner is subject to personal holding company surtax, since it was a deficit corporation at the beginning and end of the taxable year.
From evidence adduced we make the following findings of fact.
FINDINGS OF FACT.
1. Morris Investment Corporation (hereinafter called petitioner) was incorporated December 31, 1928, under the laws of Delaware, and for the taxable year 1941 it filed its corporation income and declared value excess profits tax return and personal holding company tax return with the collector of internal revenue for the fifth district of New Jersey at Newark, New Jersey.
2. During the taxable year 1941 the petitioner was a personal holding company.
3. Mrs. Katherine Clark Morris (hereinafter called Mrs. Morris) was president of the petitioner during the taxable year 1941. During that year the petitioner had outstanding 31,000 shares of common capital stock, of which Mrs. Morris owned 91.87 percent. The remainder of said stock was held by the estate of her late husband, L. R. Morris, Mrs. John H. Hall, Jr., her daughter, and John H. Hall, Jr., her son-in-law. The shares of stock held by*107 the estate of L. R. Morris, *584 Mrs. John H. Hall, Jr., and John H. Hall, Jr., were all gifts from Mrs. Morris.
4. Sometime prior to September 6, 1941, Mrs. Morris arranged to create three trusts for the benefit of her daughter and grandchildren.
5. The directors of petitioner during the taxable year 1941 were Mrs. Morris, Edward L. Blackman, and John H. Hall, Jr.
6. A special meeting of the board of directors of petitioner was held at 10:45 a. m. on September 16, 1941, at the office of Edward L. Blackman at 120 Broadway, New York, New York, the time and place having been fixed by consent of all the directors of the corporation. There were present at this meeting Mrs. Morris, Edward L. Blackman, John H. Hall, Jr., and Harry H. St. Clair, the latter being treasurer and assistant secretary of petitioner.
7. At the special meeting of the board of directors held on September 16, 1941, the following proceedings were had:
Blackman announced that the corporation had received from Katherine Clark Morris an offer to purchase for the sum of $ 131,368.75 the following stocks owned by the corporation:
700 shares of capital stock of Amerada Corporation;
150 shares of capital stock *108 of American Telephone & Telegraph Co.;
500 shares of capital stock of Union Carbide & Carbon Corporation;
25 shares of common stock of Atchison, Topeka & Santa Fe Railway Co.;
200 shares of common stock of Chesapeake & Ohio Railway Co.;
150 shares of common stock of Union Pacific Railroad Co.; and
150 shares of common stock of Corn Products Refining Co.
Blackman stated that in his opinion the offer was a good one, and recommended that it be accepted.Hall thereupon moved that the corporation accept the offer of Katherine Clark Morris to purchase said stocks from the company for the sum of $ 131,368.75, and that the officers of the corporation be directed to effect such sale and make delivery of said stocks to Mrs. Morris or to her order and to execute and to deliver all requisite assignments and documents for transfer of the stocks in accordance with their authority under standing resolution of the board of directors adopted January 6, 1932.
The motion was seconded by Blackman and was thereupon put to a vote. Upon the affirmative votes of Blackman and Hall, Mrs. Morris not voting, the motion was carried.
Hall thereupon moved the adoption of the following resolutions:
Resolved *109 that the Treasurer of this corporation be and he is hereby authorized to accept in payment for the stocks today sold to K. Clark Morris her promissory note, dated September 16, 1941, to pay $ 131,368.75 ninety days after date to Morris Investment Corporation with interest at the rate of 3%.
St. Clair suggested that specific resolutions be adopted with respect to the sale and transfer of the shares in American Telephone & Telegraph *585 Co., and Chesapeake & Ohio Railway Co., as they would probably not transfer such stocks upon the sole authority of the standing resolution as to sale and transfer of securities; and resolutions were thereupon adopted, providing that petitioner sell Mrs. Morris 50 shares of American Telephone & Telegraph Co. stock, represented by certificate NM-44657, at a price of 154 5/8 per share, and 100 shares represented by certificate GG-38748, at a price of 154 5/8 per share, and 200 shares of the common stock of the Chesapeake & Ohio Railway Co., represented by certificates C-59711 and C-59712, at a price of $ 37.25 per share; and that the officers be empowered to transfer said stock.
The figure $ 131,368.75 was the aggregate of the market prices of the *110 stocks sold, at the close of September 15, 1941. The stocks sold were all active stocks traded in on the New York Stock Exchange. The note given by Mrs. Morris was never paid.
8. The stocks purchased by Mrs. Morris from petitioner were delivered to Mrs. Morris, the proper transfer stamps were affixed, and they were delivered to three trust companies in New York City with whom Mrs. Morris had arranged to establish trusts for the benefit of her daughter and her grandchildren.
9. The following schedule shows the stocks sold to Mrs. Morris by the petitioner, as aforesaid, and the gains or losses resulting from such sale as reported by petitioner in its income tax return for the taxable year 1941.
| Gross | ||||
| Description of property | Date | sales | Cost | |
| acquired | price | |||
| 100 | American Telephone & Telegraph Co | 3/27/29 | $ 15,462.50 | $ 18,857.57 |
| 50 | do | 1/30/33 | 7,731.25 | 5,216.75 |
| 25 | Atchison, Topeka & Santa Fe Ry. Co. | |||
| common | 10/8/29 | 675.00 | 6,933.75 | |
| 200 | Amerada Corporation | 4/17/34 | 11,800.00 | 10,072.50 |
| 100 | do | 4/18/34 | 5,900.00 | 5,292.50 |
| 200 | do | 4/21/34 | 11,800.00 | 10,585.00 |
| 100 | do | 5/14/34 | 5,900.00 | 4,690.00 |
| 100 | do | 7/30/34 | 5,900.00 | 4,290.00 |
| 150 | Corn Products Refining Corp. common | 1/30/33 | 7,875.00 | 8,313.04 |
| 200 | Chesapeake & Ohio Ry. common | 2/2/33 | 7,450.00 | 5,780.00 |
| 300 | Union Carbide & Carbon Corporation | 1/2/29 | 23,550.00 | 17,522.84 |
| 100 | do | 9/9/29 | 7,850.00 | 12,662.14 |
| 32 | do | 10/17/29 | 2,512.00 | 3,425.02 |
| 68 | do | 3/25/30 | 5,338.00 | 6,635.10 |
| 150 | Union Pacific R. R. Co. common | 1/30/33 | 11,625.00 | 11,290.75 |
| Total | 131,368.75 | 131,566.96 |
| Description of property | Gain | Loss | |
| 100 | American Telephone & Telegraph Co | $ 3,395.07 | |
| 50 | do | $ 2,514.50 | |
| 25 | Atchison, Topeka & Santa Fe Ry. Co. | ||
| common | 6,258.75 | ||
| 200 | Amerada Corporation | 1,727.50 | |
| 100 | do | 607.50 | |
| 200 | do | 1,215.00 | |
| 100 | do | 1,210.00 | |
| 100 | do | 1,610.00 | |
| 150 | Corn Products Refining Corp. common | 438.04 | |
| 200 | Chesapeake & Ohio Ry. common | 1,670.00 | |
| 300 | Union Carbide & Carbon Corporation | 6,027.16 | |
| 100 | do | 4,812.14 | |
| 32 | do | 913.02 | |
| 68 | do | 1,297.10 | |
| 150 | Union Pacific R. R. Co. common | 334.25 | |
| Total | 16,915.91 | 17,114.12 |
10. In its income tax return for the calendar year 1941 the petitioner, with reference to the stocks sold to Mrs. Morris and listed in paragraph 9 above, reported a net long term capital loss of $ 198.21.
11. In explanation of this transaction the petitioner attached the following statement to its income tax return for the taxable year 1941:
The stocks listed above, having a total acquisition cost of $ 131,566.96, were sold and paid for at a total price of $ 131,368.75 and delivered Sept. 16, 1941, to the *586 purchaser, Mrs. K. Clark Morris, chief stockholder and president of this company, the*112 prices being the market prices for said stocks at the close of September 15, 1941. The net loss realized on these sales was $ 198.21.
12. The petitioner kept no general investment account on its books. Each certificate of stock held by petitioner, including those sold to Mrs. Morris on September 16, 1941, was kept in a separate account on petitioner's books and accounted for separately, so that petitioner could tell what the adjusted acquisition cost of such certificate was at any time to apply against any ultimate realization, and to collate tax returns easily. After the sale to Mrs. Morris, entries were made in the separate accounts of cash certificate on petitioner's books to record the sale. The amount entered as sale price was the price at which the stock had sold at the last sale prior to September 15, 1941.
13. Petitioner had a deficit of $ 10,420.51 on December 31, 1940, and at the close of December 31, 1941, had a deficit of $ 11,144.73. Its earnings were paid out at the end of the year.
OPINION.
The first and principal question here presented has already received no little attention in Lakeside Irrigation Co. v. Commissioner, 128 Fed. (2d) 418,*113 affirming 41 B. T. A. 892, where it is fully discussed; and in Reddington Co. v. Commissioner, 131 Fed. (2d) 1014, affirming the Board of Tax Appeals. These cases relied upon by the respondent, lay down the rule that section 24 (b) (1) (B) of the Internal Revenue Code1 is applicable where there is a transaction involving sale of various securities between a corporation and an individual owning more than 50 percent of its stock, and that the stocks are to be considered separately sold, and losses on some of such stocks may not be deducted, though there is a taxable gain on the other stocks sold in such transaction. To the same effect is B. O. Mahaffey, 176">1 T. C. 176. The petitioner, however, urges that the present case is distinguishable from those above named, in particular contending that in those cases separate prices were fixed for the different classes of stock sold; that the price paid had no relation to cost, as in the instant case; and that there the parties relied upon unity of purpose, a transfer at one time, and lump payment, to make the transaction indivisible -- whereas here, *114 *587 it is argued, in effect, there was one indivisible sale, with no pricing of the various securities, but an avoidance thereof, and a purchase intentionally at cost. It is also said that the stocks were active and purchased at their market prices, and that section 24 (b) (1) (B) was not intended to prohibit the transaction here examined.
We are unable to discern the desired distinction between this case and those above cited. That the transaction sale was, in effect, one at cost goes only to the good faith*115 of the parties participating, and in the Reddington case, supra, the court says that the intention was not to avoid taxes can not be significant. There was, in our view, no more indivisible transaction here than in the above cases. The resolution by petitioner's board of directors specially set a separate price upon the stock represented by each stock certificate, in case of the stock in American Telephone & Telegraph Co. and in Chesapeake & Ohio Railway Co. Examination of the amounts involved in the list of stock sold, as shown in our findings, discloses that these stocks total $ 29,644.75, out of the $ 131,368.75 sold. How, then, may it be said, with reason, that all stocks were sold for a lump sum indivisible? It was divided by such resolution, and the fact that the reason for doing so was to facilitate transfer does not negative the fact of division. Moreover, the petitioner had for years kept separate, in an individual account, the stock represented by each certificate purchased, so that it might with accuracy always compute "the adjusted acquisition cost to apply against any ultimate realization," as the petitioner's treasurer phrased the matter. When the time*116 came for sale of these stocks, the price was calculated by adding together the market price for all; and on its income tax return, referring to the amount received, petitioner says "the prices being the market prices for said stocks at the close of September 15, 1941." Moreover, immediately thereafter we find, "The net loss realized in these sales [italics supplied] was $ 198.21," and that amount was reported as a loss. The petitioner is in effect in the position of having kept the stocks carefully separated, to facilitate bookkeeping, to calculate adjusted costs against ultimate realization, and to collate tax returns, yet denying such separability when there was such ultimate realization from the sale here in question. Failing to find here any more separation of the various stocks than in the cited cases, we conclude that section 24 (b) (1) (B) of the Internal Revenue Code applies and that the Commissioner did not err in adding the gains to income while denying deduction of the losses.
The petitioner contends also that it should not be subjected to personal holding company surtax. The respondent upon brief denies that petitioner is entitled to relief, because of the fact *117 that section 27 (a) (3) of the Internal Revenue Code (with reference to dividends paid credit, and considering deficits) is inapplicable to the petitioner, *588 a personal holding company. Petitioner, however, in its reply brief, specifically admits that section 27 (a) (3) does not apply to it, as a personal holding company; but seeks immunity "upon the broad ground that it was not the intent of Congress to impose so unfair and unreasonable a tax," saying that it had a deficit both at the beginning and end of the taxable year, that it could not relieve itself from the harsh provisions of the personal holding company surtaxes, because, the corporation having a deficit, any distributions to its stockholders would have been from capital and nontaxable in the hands of the stockholders, so that, under section 27 (i) of the Internal Revenue Code2 petitioner could not have secured credit for dividends paid. Therefore, petitioner argues, if we understand the point, it could not have been the intent of Congress to apply the personal holding company surtaxes in such circumstance.
*118 This, however, is asking us to legislate. The applicable act, section 500 of the Internal Revenue Code, does not set up the exception asked for by the petitioner. We are not convinced that we should interpret an exception into it.
Decision will be entered for the respondent.
Footnotes
1. SEC. 24. ITEMS NOT DEDUCTIBLE.
* * * *
(b) Losses from Sales or Exchanges of Property. --
* * * *
(1) Losses disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly --
* * * *
(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual.↩
2. SEC. 27. CORPORATION DIVIDENDS PAID CREDIT.
* * * *
(i) Nontaxable Distributions. -- If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this chapter for the period in which the distribution is made, such part shall not be included in computing the basic surtax credit.↩