*2382 1. Distributions made by a corporation in 1922 held to be dividends within the meaning of section 201(a) of the Revenue Act of 1921, to the extent that they represented earnings or profits accumulated since February 28, 1913, subject to the surtax and exempt from the normal tax, even though the distributions were made in liquidation of the corporation.
2. The remainder of the amounts distributed held to be the proper basis for computing gain or loss to the stockholders on the liquidation of the corporation.
*1405 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1922, as follows:
| Eric A. Pearson | $841.06 |
| Charles H. Howell | 488.95 |
| Caspar W. Morris | 2,073.17 |
| William M. Elkins | 4,258.38 |
The issue is as to the proper method of taxing to the petitioners amounts received by the partnership of Elkins, Morris*2383 & Co., of which the petitioners were members.
FINDINGS OF FACT.
The petitioners were, during the calendar year 1922, members of the partnership of Elkins, Morris & Company, investment bankers and brokers of New York and Philadelphia, their interest in said partnership being 14, 6, 40, and 40 per cent, respectively.
On June 20, 1922, Elkins, Morris & Co. purchased from the individual stockholders all of the capital stock of the Parish Manufacturing Co., consisting of 3,000 shares of the par value of $100 each, for a consideration of $2,172,600.96. The Paris Manufacturing Co. had been inactive for several years and its assets had been converted *1406 into cash and securities. The purpose of Elkins, Morris & Co. in acquiring the stock of the Parish Manufacturing Co. was to "make some money out of the deal and liquidate it at the same time."
On March 1, 1913, the Paris Manufacturing Co. had a capital of $375,690.74, consisting of capital stock of the par value of $100,000 and surplus of $275,690.74. On July 22, 1915, a stock dividend of $200,000 was declared and thereafter the capital stock was $300,000, divided into 3,000 shares of the par value of $100 each. On*2384 June 21, 1922, the corporation had capital stock of $300,000 and a surplus of $1,898,923.12, of which surplus $1,823,232.38 represented earnings or profits accumulated since February 28, 1913.
On June 21, 1922, at a meeting of the board of directors of the Parish Manufacturing Co., the following action was taken:
The President further stated that the Company had an outstanding capital stock of three hundred thousand dollars ($300,000) and accumulated surplus earnings of approximately one million nine hundred thousand dollars ($1,900,000); that he considered it advisable to distribute the accumulated surplus among the stockholders, and also to make a distribution on account of the capital, and that in his judgment it was to the best interests of the stockholders to take action toward dissolution of the Company and the distribution of all its assets.
Thereupon, on motion of Mr. Brown, duly seconded; the following resolutions were unanimously adopted:
RESOLVED, that a dividend of twenty-five dollars ( $25) per share be and is hereby declared on the common and preferred stock of the company, payable forthwith in cash to the stockholders of record as of this date, and the treasurer*2385 be and he is hereby authorized and directed to issue checks for said dividend:
RESOLVED FURTHER, that a dividend be and is hereby declared of the following securities, and the proper officers of the company be and they are hereby authorized and directed to deliver the securities to the holders of the common and preferred stock of this company, in proportion to the shares respectively held by them, viz:
* * *
RESOLVED FURTHER, that a dividend of ninety-nine dollars ( $99) per share be and is hereby declared on the common and preferred stock of the company, in liquidation of the company, and the treasurer of the company be and he is hereby directed to issue check forthwith in payment of said dividend.
RESOLVED FURTHER, that the proper officers of the company be and they are hereby directed forthwith to take all necessary steps to effect a dissolution of the company and the distribution of all its remaining assets.
RESOLVED, that the Fidelity Trust Company with whom the securities of this Company are now on deposit, be requested and directed to deliver the same to Charles H. Howell for distribution of the same among the stockholders of the Company, pursuant to resolutions*2386 this day adopted.
On the same day, pursuant to the resolution of the board of directors, the Parish Manufacturing Co. distributed as dividends to Elkins, Morris & Co., its sole stockholder, $372,000 in cash, together with securities of the fair market value of $1,823,415.82.
*1407 On December 29, 1922, at a meeting of the board of directors of the Parish Manufacturing Co., action was taken as shown by the following minutes of the meeting:
The President then stated to the Board that the Company was no longer actively engaged in the business for which it was incorporated and that he desired the Board to consider the advisability of dissolving the corporation and making distribution of its assets.
Whereupon, after full discussion, the following resolutions were moved, seconded, and unanimously adopted:
RESOLVED that in the judgment of the Board of Directors it is deemed advisable and most for the benefit of Parish Manufacturing Company that the corporation should be dissolved; and
FURTHER RESOLVED that the proper officers of this company be and they are hereby authorized to do all things necessary, either by calling a special meeting of the stockholders of this Company*2387 to take action in favor of or against said proposed dissolution, or by obtaining the consent in writing of all stockholders of this Company to said dissolution for the purpose of effecting the intended object of the foregoing resolution in accordance with the by-laws of this Company and of the laws of the State of New Jersey relating to said proposed dissolution; and
FURTHER RESOLVED, that when the stockholders of this company shall signify their approval, either by resolutions duly adopted or by their consent in writing to the dissolution of this Company, the proper officers of this Company be and they are hereby authorized to execute and file with the proper public officials all papers and documents necessary to effect said dissolution, and after payment or provision for payment has been made of all debts or liabilities owing by this Company, to declare a dividend of $3,507.30 dollars in final liquidation of the Company's capital stock.
On the same day, pursuant to the resolution of the board of directors, there were distributed to Elkins, Morris & Co. the remaining assets of the Parish Manufacturing Co., consisting of cash in the amount of $3,507.30.
The partnership of Elkins, *2388 Morris & Co. made a return of income for the year 1922, in which it reported that of the amount of $2,195,415.82 received by it from the Parish Manufacturing Co. on June 21, 1922, $372,183.44 represented a return of capital, and that $1,823,232.38 represented a dividend paid out of earnings accumulated since February 28, 1913, taxable at surtax rates. The partnership also reported that it sustained a loss of $1,796,910.22 on the liquidation of the Parish Manufacturing Co., the loss being measured by the difference between the amount paid for the stock of that company, to wit, $2,172,600.96, and the amount theretofore received as a return of capital, to wit, $372,183.44, plus the amount of the final dividend, to wit, $3,507.30.
The petitioners, in their income-tax returns for the year 1922, included in income their respective shares of the dividend as determined by the partnership, and also took deductions from gross income of their respective shares of the loss claimed to have been sustained by the partnership in the liquidation of the Parish Manufacturing *1408 Co. The respondent determined that the partnership realized a gain of $26,322.16 on the transaction, which amount*2389 he measured by the difference between the amount paid by the partnership for the capital stock of the Parish Manufacturing Co., to wit, $2,172,600.96, and the total amount received in liquidation, to wit, $2,198,923.12, and that such gain should be taxed to the petitioners at the surtax rates.
OPINION.
MARQUETTE: The parties hereto have stipulated that Elkins, Morris & Co. purchased all of the capital stock of the Parish Manufacturing Co. on June 20, 1922, and was the owner thereof from that date until the corporation was liquidated. The respondent in his answer filed herein admits that Elkins, Morris & Co. owned all of the said capital stock, but he now takes the position that the transaction was handled on the brokerage basis and that there was no sale of the stock to the partnership. The evidence shows that the partnership in acquiring the stock of the Parish Manufacturing Co., took into consideration the amount of brokerage fees and commissions it could earn on the subsequent sale of the assets of the company, as well as their profit thereon, but it does not show that there was not a bona fide purchase and sale, and we see no reason for assuming that the stipulation and*2390 the admissions of the answer do not set forth the facts of the transaction.
The issue raised by the pleadings and the stipulation of facts is as to the proper method of taxing the amounts received by the partnership upon the distribution of the assets of the Parish Manufacturing Co. The petitioners contend that the amounts distributed, in so far as they represented earnings of profits of the corporation accumulated since February 28, 1913, are dividends taxable only at surtax rates, and that the remainder of the distributions should be applied against the purchase price of the stock and gain or loss determined therefrom. The respondent says that the entire amount distributed should be applied against the cost of the stock and the excess over cost, if any, taxed at the surtax rates.
The transaction in question occurred in 1922, and is governed by the provisions of the Revenue Act of 1921, the parts of which pertinent here, are as follows:
SEC. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245), means any distribution made by a corporation to its shareholders*2391 or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922.
* * *
(c) *1409 Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.
* * *
SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property * * *.
In *2392 , this Board held that the term "dividend," as defined in section 201 of the Revenue Act of 1921, includes distributions in liquidation of a corporation to the extent of the earnings or profits accumulated since February 28, 1913, contained therein, and to the extent of these earnings such distributions are taxable as dividends, subject to the surtax and exempt from the normal tax. In that case we said:
When we come to the Revenue Act of 1921 we find "dividends" included in taxable income and defined in section 201(a) substantially as in prior Acts, as -
* * * Any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913 * * *.
But subdivision (c) as carried in the 1918 Act is omitted and no specific provision for liquidating dividends is made, except the negative one contained in the new subdivision (c) set forth above. Congress dropped the distinction between liquidating dividends and dividends as defined in section 201(a) which it has recognized in the 1918 Act, and declared anew its intent to tax as dividends all*2393 distributions of earnings accumulated since February 28, 1913, whether the same be made in liquidation or otherwise, as was the case under the 1916 and 1917 Acts. This clearly appears from the provision of the new subdivision (c) that "any distribution * * * made * * * otherwise than out of (1) earnings of profits accumulated since February 28, 1913, * * * shall be applied against and reduce the basis provided in section 202" for determining gain or loss on the sale or other disposition of property. Earnings or profits accumulated since February 28, 1913, distributed in liquidation are to be excluded from the computation of gain derived or loss sustained from such distribution, and are to be taxed as other dividends, regardless of whether there is a gain derived or loss sustained from such distribution. The intent of Congress to remove the distinction between liquidating dividends and other dividends, and to make its definition of the term in section 201(a) comprehensive and all-inclusive, so far as earnings or profits accumulated since February 28, 1913, are concerned, appears even more clearly from the history of the 1921 Act in process of enactment. The House Bill provided, *2394 in section 201(c) for the treatment of liquidating dividends in the identical language of the 1918 Act. The Senate amendment eliminated the provision entirely and substituted as subdivision (c) the provision as to stock dividends appearing as subdivision (d) in the Act as passed. The House accepted the amendment with an amendment which appears as subdivision (c) in the Act as finally passed. The statement of the House Managers from the Committee on Conference relative to this provision, is:
*1410 The House Bill provided that amounts distributed in liquidation of a corporation shall be treated as in part or in full payment in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The Senate amendment strikes out this provision. The House recedes with an amendment, * * * [Referred to above]
There would seem to be no doubt that Congress intended its definition of "dividends" to include inquidating dividends to the extent of earnings accumulated since February 28, 1913.
It is our conclusion that the term "dividends" as defined in section 201 of the Revenue Act of 1921, includes distributions*2395 in liquidation to the extent of the earnings or profits accumulated since February 28, 1913, contained therein, and that to the extent of those earnings such distributions are taxable as dividends, subject to the surtax and exempt from the normal tax. * * *
The ruling in the Darrow case was approved and followed in .
In the light of the decisions cited it follows, and we so hold, that the distributions involved herein, in so far as they represented earnings or profits of the Parish Manufacturing Co. accumulated since February 28, 1913, constituted dividends within the meaning of section 201 of the Revenue Act of 1921, and are subject to the surtax and exempt from the normal tax, and that the remainder of such distributions should be used as the basis for computing gain or loss under section 202 of said Act. It appears that the distributions have been properly treated by the partnership and the petitioners.
Judgment will be entered under Rule 50.