*640 A corporation declared a preferred stock dividend of $3,500,000 in order to reduce the value of its common stock from $1,300 to $300 a share in order to facilitate the acquisition of such common stock by its younger executives and employees pursuant to a fixed policy of the corporation. Subsequently, in order to furnish a profitable form of investment for the funds of two employee associations, the corporation, on their behalf, purchased approximately 9 percent of its preferred stock thus issued in varying amounts from its stockholders, including petitioner. Held, not such an issuance of a stock dividend and cancellation or redemption as to be equivalent to a dividend taxable under section 115(g), Act of 1932.
*878 This proceeding arises upon respondent's determination of a deficiency of $16,519.50 in petitioner's income tax liability for the year 1932, for the reason that respondent holds that the proceeds of the sale by petitioner to the West Publishing Co. of a part of a stock dividend issued shortly before to the petitioner by that company was essentially*641 equivalent to a distribution of a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1932. In an amended answer filed herein, respondent alleges that he erred in failing to include in the petitioner's taxable income for the year 1932 the value of all of the preferred stock of the West Publishing Co. received by petitioner as a stock dividend upon common stock of the company owned by him, without regard to any sale by him of such stock.
The facts in this case were to a large extent stipulated by the parties, but, in addition to the stipulation entered into and supplementary thereto, there was some oral testimony taken at a hearing held at St. Paul, Minnesota, and also a deposition of Homer P. Clark, who was president of the West Publishing Co. until October 1932 and subsequently its chairman of the board. The facts material to our decision herein, as disclosed by the stipulation, testimony, and deposition, are as follows.
FINDINGS OF FACT.
West Publishing Co. is a corporation organized under the laws of the State of Minnesota in the year 1882, having on June 30, 1932, authorized capital stock consisting of 7,000 shares of common stock and 14,000 shares*642 of preferred stock, all of a par value of $100 per share. Of this authorized capital stock there were then issued and *879 outstanding 3,500 shares of common stock and no preferred stock. On July 1, 1932, at a special meeting of the stockholders of the West Publishing Co. a resolution was adopted amending the articles of incorporation, thereby fixing the authorized capital stock at 7,000 shares of common stock and 35,000 shares of preferred stock, of a par value of $100 per share. Thereafter, on July 15, 1932, a resolution was adopted by the board of directors of the company, declaring a stock dividend of $3,500,000 in preferred stock, payable August 1, 1932, pro rata, to the holders of common stock of the company.
Prior to the stock dividend paid on August 1, 1932, to the holders of common stock, the value of the common stock of the West Publishing Co. was $1,300 per share, and the purpose of the company in declaring that dividend was to reduce the value of the common stock to a figure within the reach of the resources of the younger men connected with the company, and to provide them in some part with a security which could be readily sold or hypothecated to aid them*643 in purchasing such common stock, all in furtherance of a fixed policy of the company to have its common stock owned by those persons actively engaged in the management of the company's affairs, and by those persons who were prospective managers, in order that, because of their ownership interests, they would lend their best efforts to the advancement of the company's business, and hence to their own advantage. In furtherance of this policy, certain holders of common stock, who were officers and employees of the company and owned substantially all of the then outstanding common stock of the company, entered into an agreement for resale of the common stock in 1922, which agreement provided that such stockholder would not sell or dispose of his common stock while he was in the employment of the company without first offering it for sale to the company; that upon the death or termination of employment of any such stockholder, his common stock would be offered to the company at a price to be arrived at by agreement or arbitration; that any stock so purchased should be allotted by the company and resold to such employees as the West Publishing Co. should designate for the purpose of safeguarding*644 and insuring the management of the company. A similar agreement was made in 1926, which contained a formula for the determination of the price to be paid for said common stock, according to which formula the value of the common stock was, in 1932, the sum of $1,300 per share. Sometime prior to August 1, 1932, three of the common stockholders, who owned together 439 shares of the common stock, announced their intention of retiring on August 1 from active participation in the company's affairs, and the company, therefore, knew that it would have this stock available for allotment and resale to its younger executives and employees on that date. The petitioner *880 herein was one of such younger executives and employees, and was allotted by the company 149 out of the 439 shares of the stock becoming available for allotment and resale on August 1, 1932. Petitioner on that date already owned 352 shares of the common stock, and therefore received 3,520 shares of preferred stock as his pro rata part of the stock dividend.
West Publishing Co. Preferred Stock Association is a voluntary association organized in 1913 by the employees of the West Publishing Co. and operated for their*645 benefit as a savings institution. West Publishing Co. Employees' Benefit Association is a voluntary association organized in 1909 and operated for the benefit of the employees of West Publishing Co. as a sickness and accident association. The articles of the former association originally provided that the funds thereof should be invested only in preferred stock of the West Publishing Co., since at the time of its organization the West Publishing Co. had outstanding an authorized issue of preferred stock, and the funds of both the associations were for a long time exclusively invested in the preferred stock. However, by 1929 the West Publishing Co. had redeemed and retired all of its outstanding preferred stock, and at that time it was necessary to amend the articles of the West Publishing Co. Preferred Stock Association to permit investment of its funds in United States Government bonds. Thereafter, the funds of both associations, until May 1, 1933, were invested in Government bonds, which bore an interest rate of slightly less than 4 percent per annum. Upon the declaration of the preferred stock dividend on August 1, 1932, the officers of the West Publishing Co., who were active*646 in the affairs of the two associations, including the petitioner herein, desired to reinvest the funds of the two associations in the more profitable preferred stock of the West Publishing Co. made available at that time for investment purposes. The funds of the two associations which were then invested in United States Government bonds amounted to $315,000, and, in order to substitute said preferred stock for the bonds in the investment portfolios of the two associations, the West Publishing Co., from August 1, 1932, to April 15, 1933, purchased its own preferred stock in varying amounts from its stockholders on behalf of the two associations until it had acquired 3,150 shares thereof. The acquisition of this number of shares of preferred stock was accomplished with some difficulty, and any competition in the market for the preferred stock on the part of officers and employees of the company was, therefore, discouraged, the company informing officers and employees who were prospective buyers that the company wished to acquire such stock for the two associations. Each sale of the preferred stock was the consummation of an offer by individual stockholders of the company, and constituted*647 a separate transaction, *881 there being no general offer to the stockholders to buy preferred stock. There was no agreement at any time that the company would purchase any definite amount of preferred stock forming a part of the stock dividend from any stockholder. These purchases made by the West Publishing Co. of its preferred stock were not made pro rata. Of the total of 3,150 shares purchased, 3,110 shares were purchased from common stockholders receiving preferred stock as a stock dividend on August 1, 1932, and 40 shares from persons owning no common stock and who had acquired the preferred stock sold by them by purchase. Owners of 1,500 shares of the 3,500 shares outstanding common stock sold preferred stock to the company in amounts ranging from 3.4 percent to 100 percent of the stock received by them in the stock dividend. The total amount of such preferred stock sold to the company was 9 percent of the total stock dividend. All of the 3,150 shares of the preferred stock so acquired by the company were canceled pursuant to the advice of counsel for the company that the stock was legally retired and should, therefore, be canceled, and, under the articles of incorporation*648 of the company, be reissued. In order to avoid the liquidation of the United States Government bond holdings of the two associations, except as one transaction, the company did not reissue the preferred stock acquired by it on behalf of the two associations until May 1, 1933, by which time the full number of shares needed by the two associations had been acquired, but on that date 3,000 shares of its preferred stock were sold and reissued by the company to the West Publishing Co. Preferred Stock Association at $100 per share, and 150 shares thereof to the West Publishing Co. Employees' Benefit Association at $100 per share.
On August 8, 1932, petitioner sold to the West Publishing Co., which was buying for the purposes outlined above, 350 shares of the 3,520 shares of preferred stock which he had received as a dividend, for the sum of $35,046.16, which amount was the par value of the stock plus the accrued dividend thereon from and after August 1, 1932, for the purpose of procuring funds with which to purchase the said 149 shares of common stock which had been allotted to him and to avoid borrowing too heavily to make the purchase, and on April 15, 1933, petitioner sold 100 additional*649 shares of his preferred stock which he had received as a stock dividend for $10,125, which amount was the par value thereof, plus the accrued dividend thereon from and after February 1, 1933, in order to permit the company to acquire the 100 additional shares of preferred stock which were needed to make up the 3,150 shares of such stock to be reissued to the two employee associations.
Petitioner, in his return for the calendar year 1932, included as capital gain the difference between the sum of $35,000 and $29,452.50, *882 which was the cost basis allotted by him to the preferred stock sold by him to the West Publishing Co. on August 8, 1932, and it is stipulated that if the amount received by petitioner upon such sale is to be treated as purchase price on a sale and not as a dividend received, the cost basis allotted to the preferred stock so sold by the petitioner and the capital gain as returned by him are correct, except that there should be added thereto the sum of $45.16, and the said sum of $45.16 should be deducted from the dividends returned by the petitioner in his return, and the petitioner, in such event, is entitled to a refund of $19.42.
A correct statement*650 of the earnings, profits, dividends declared and paid, and surplus account of West Publishing Co. for the years 1913 to 1933, is as follows:
| Year | Book profits | Cash dividends | Stock dividends | Surplus |
| 2/28 1913 | $2,221,181 | |||
| 7/31 1913 | 77,072 | 50,700 | 2,247,553 | |
| 1914 | 329,767 | 171,650 | 2,405,670 | |
| 1915 | 264,691 | 166,625 | 2,503.736 | |
| 1916 | 299,496 | 226,112 | 350,000 | 2,227,120 |
| 1917 | 247,629 | 164,110 | 2,310,639 | |
| 1918 | 160,411 | 168,968 | 2,302,082 | |
| 1919 | 166,583 | 121,853 | 2,346,812 | |
| 1920 | 312,826 | 150,866 | 2,508,772 | |
| 1921 | 279,403 | 151,495 | 2,636,680 | |
| 1922 | 142,096 | 152,315 | 2,626,461 | |
| 1923 | 393,927 | 132,764 | 1,400,000 | 1,487,624 |
| 1924 | 499,917 | 175,000 | 1,812,541 | |
| 1925 | 419,658 | 199,500 | 2,032,699 | |
| 1926 | 410,880 | 245,000 | 2,198,579 | |
| 1927 | 510,025 | 252,000 | 2,456,604 | |
| 1928 | 653,462 | 253,764 | 2,856,302 | |
| 1929 | 874,630 | 296,555 | 3,434,378 | |
| 1930 | 920,210 | 617,679 | 3,736,910 | |
| 1931 | 1,120,226 | 336,000 | 4,521,136 | |
| 1932 | 1,037,457 | 402,500 | 5,156,093 | |
| 1933 | 815,670 | 481,162 | 3,500,000 | 1,990,601 |
The stock dividends of 1916 and 1923, like the stock dividend of 1933, were of preferred stock, and the purpose which motivated the company*651 in making all three of such stock dividends was to facilitate the acquisition of the majority of the common stock of the company by the younger officers and employees from persons who had retired from the management, or from estates.
OPINION.
KERN: Since respondent has not referred in any way in his brief or request for findings of fact to any issue raised by the affirmative allegations contained in his amended answer, we will consider that the only issue presented by this case for our determination is whether or not the purchase from the petitioner by the West Publishing Co. of 350 shares out of the 3,520 shares of the preferred stock of the company, issued to him as a stock dividend on August 1, 1932, was essentially equivalent to the payment to him of a taxable dividend under section 115(g) of the Revenue Act of 1932.
*883 The legislative background of this section of the act was discussed by us in the case of , and a somewhat exhaustive discussion of the decided cases interpreting this section was made in the case of *652 . While it is apparent that the principal purposes of this section was to prevent tax evasion by means of the redemption by a corporation of a stock dividend issued by it, it is also apparent from the general language used in the section of the act under consideration, and the cases which have construed it, that the facts in each case must be carefully considered. However, the cases indicate that certain considerations are helpful in determining whether or not this section is applicable to the facts of the case before us.
Where it is apparent that there is a "continuing plan" or "artifice" to evade taxation by means of the issuance of the stock dividend and its cancellation or redemption, we may be justified in holding that section 115(g) of the Revenue Act of 1932 is applicable. ;. Another significant fact in determining whether or not this section is applicable is the pro rata distribution and redemption of a stock dividend. Regulations 77, art. 629. In such a determination we may also properly consider whether or not the corporation has paid substantial*653 cash dividends. ;We may also consider the time intervening between the issuance of the stook dividend and its redemption, ; , and also whether or not there is complete control by petitioner of the corporation to which he was indebted. ; . Another proper consideration is whether the corporation had cash on hand with which to pay a cash dividend. .
However, one of the most important considerations in determining whether or not this section applies to the declaration of stock dividends and their subsequent redemption or cancellation, is whether or not both the declaration and the redemption or cancellation are dictated by legitimate reasons connected with the business of the corporation. ; Alfred E. *654 ; . This is particularly important since the existence of a legitimate business reason on the part of the corporation for the issuance of a stock dividend, and its subsequent redemption or cancellation, would clearly indicate the nonexistence of a "continuing plan" or "artifice" to evade taxation mentioned above.
In the instant case it is apparent that the purpose of the West Publishing Co. in declaring a preferred stock dividend in 1932 was *884 to reduce the value of its common stock to a figure which would make it available for purchase by its younger executives and employees, and to furnish to such executives and employees who already owned common stock of the corporation a form of security which could be used by them in making a purchase of the common stock, thus facilitating the ownership of the common stock of the corporation by those who were actively engaged in its management and operation. Obviously, this was a legitimate business purpose. It is equally apparent that the purpose of the acquisition by the corporation of a certain part of the preferred stock dividend involved*655 in this case, and its consequent redemption or cancellation, was to make available to two employee associations, described in the findings of fact herein, a profitable form of investment for the funds of these associations. It is also obvious that this constituted a legitimate business purpose.
In view of these facts, and in view of the absence of any "continuing plan" or "artifice" to evade taxation, the fact that redemption of the preferred stock by the corporation was not pro rata and involved only a relatively small amount of the preferred stock dividend, the fact that there had been, over a long period of years, substantial cash dividends paid by the corporation to its common stockholders, the fact that the petitioner did not have complete control over the corporation and was not indebted to it, and the further fact that there was no showing that the corporation had on hand cash with which to pay a cash dividend, all impel us to the conclusion, in spite of the short time intervening between the issuance of the preferred stock dividend herein and its partial purchase by the corporation, that the stock dividend issued to petitioner by the West Publishing Co. on August 1, 1932, was*656 not essentially equivalent to the payment to him of a taxable dividend under section 115(g) of the Revenue Act of 1932.
Reviewed by the Board.
Judgment will be entered for the petitioner.