*2000 A corporation was organized in 1921 to engage in the manufacture and sale of silk and other products and took over the assets and assumed the liabilities of a silk-manufacturing company. There was no change in the stockholders of the two companies, the new corporation issuing five shares of its stock of no par value for each share of stock of the old company. The new corporation operated at a loss during its entire corporate existence and was dissolved in 1923. Held, that the amount of $112,500 received in 1923 by the petitioner as a stockholder of the dissolved corporation, which sum is not in excess of the cost of his stock, was a distribution of capital and is not taxable as a dividend under the Revenue Act of 1921.
*1171 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the calendar year 1923 in the sum of $30,291.57. It is alleged that the respondent erred in treating as a taxable dividend the amount of $112,500 received by the petitioner in 1923, which sum was paid to petitioner on account*2001 of his ownership of stock of the Poidebard Silk Products Corporation, a dissolved corporation.
FINDINGS OF FACT.
Petitioner is an individual, with his principal office at 52 Vanderbilt Avenue, New York, N.Y.
In January, 1921, petitioner purchased 450 shares of the capital stock of the Poidebard Silk Manufacturing Company, a corporation organized under the laws of the State of New Jersey, for the sum of $150,750. At the time this purchase was made there were outstanding 1,250 shares of stock of the par value of $100 each.
*1172 In April, 1921, the Poidebard Silk Products Corporation was organized under the laws of the State of New Jersey, with an authorized capital of 10,000 shares of stock of no par value. This corporation came into existence in order that, in addition to the manufacture of silk and silk products, it might also engage in the manufacture and sale of products other than silk, such as rayon, artificial silk, thrown silk and a waterproof taffeta for umbrella material, which could not be done under the powers contained in the charter of the Poidebard Silk Manufacturing Company.
On April 22, 1921, the Poidebard Silk Products Corporation, in consideration*2002 of the issuance of 6,250 shares of its stock to the stockholders of the Poidebard Silk Manufacturing Company, purchased the assets and assumed the liabilities of the Poidebard Silk Manufacturing Company. For each share of stock of the Poidebard Silk Manufacturing Company the holder thereof was given 5 shares of stock of the Poidebard Silk Products Corporation, the petitioner receiving 2,250 shares in exchange for the 450 shares then owned by him. There was no change in the stockholders of the two companies. The new corporation was unsuccessful from the date of its organization. It kept its books and filed its income tax returns on the basis of a fiscal year ended November 30. For the fiscal years ended November 30, 1921, 1922, and 1923, which periods embraced its entire corporate existence, the new corporation reported operating losses.
In the balance sheet attached to the return for 1921, which was the first year the new corporation was in operation, the capital stock was set out in the same amount as that of the old corporation, to wit, $125,000, and the amount in the surplus account of the old company was carried forward and reported as surplus of the new corporation. This*2003 item of "surplus" was reported by the new corporation in a reduced amount for each year, due to the losses sustained in operation. In the balance sheet attached to the return for 1923, which is the year the corporation was dissolved, the amount of $460,230.93 is listed as capital stock and this amount appears in Schedule L, Reconciliation of Net Income and Analysis of Changes in Surplus, opposite the item "Surplus and undivided profits as shown by balance sheet at close of proceeding taxable period." On the return for the preceding taxable period this same amount appears as "Capital and Surplus."
On September 20, 1922, the Board of directors of the Poidebard Silk Products Corporation passed the following resolution:
RESOLVED, that it is the consensus of the Board of Directors that the business should be wound up, and that the President, Mr. Sansome, should have full authority to liquidate the plant and stock at the best possible rates, with a view to completing the liquidation by the 31st of December, 1922.
*1173 At the annual meeting of stockholders, held on January 18, 1923, the following resolution was passed:
RESOLVED, that this meeting specifically approves the*2004 action of the Board of Directors at their meeting on September 20, 1922, in voting that the business should be would up and that the President should have full authority to liquidate the plant and stock.
On March 29, 1923, there was executed by all the stockholders a unanimous consent to dissolution of Poidebard Silk Products Corporation. A certificate of dissolution was issued by the Secretary of State of the State of New Jersey on May 22, 1923.
Under the authority of the above quoted resolutions of the board of directors and of the stockholders of the Poidebard Silk Products Corporation, the petitioner took charge of the assets of the corporation and proceeded to liquidated the plant and stock. On June 26, 1923, there was distributed to the stockholders the sum of $312,500, of which amount petitioner received $112,500. No other distribution was made to the stockholders in 1923. About the middle of the year 1924 petitioner acquired the remaining 4,000 shares of stock of the Poidebard Silk Products Corporation, thereby becoming the owner of the entire outstanding stock of that corporation. The corporation was completely liquidated in 1924 and petitioner received in that*2005 year, as sole stockholder, the sum of $211,204.15.
In his return of income for the calendar year 1923 petitioner did not include the sum of $112,500 received from the Poidebard Silk Products Corporation. The Commissioner treated this amount as a dividend subject to surtax and asserted a deficiency in tax in the sum of $30,291.57.
OPINION.
MATTHEWS: The issue presented is with respect to the proper method of taxing the amount received by petitioner in 1923 upon the distribution of a portion of the assets of the Poidebard Silk Products Corporation. It is the position of the respondent that the entire amount of $112,500 received by petitioner in 1923 constitutes a taxable dividend under the provisions of the Revenue Act of 1921. The petitioner points out that the Poidebard Silk Products Corporation, the dissolved corporation, reported operating losses for each year it was in existence and contends that inasmuch as the petitioner paid $150,750 for the stock which he acquired in 1921 and received only $112,500 in 1923, there was no taxable distribution in that year. It is the petitioner's position that the entire amount distributed should be applied against the cost of the*2006 stock and that it is only the excess over cost which is taxable to the petitioner in the year in which such excess is received.
*1174 This case is governed by the Revenue Act of 1921, from which we quote the following pertinent provisions:
SEC. 201. (a) That the term "dividend" when used in this title * * * means 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, * * *.
(b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; * * *
(c) 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*2007 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 * * *.
It is well settled that a liquidating distribution under the 1921 Act is taxable as a dividend and not as a capital gain, to the extent that it is a distribution of earnings or profits accumulated since February 28, 1913. In , we held that dividends, as defined in section 201 quoted above, include distributions in liquidation of a corporation to the extent of the earnings or profits accumulated since February 28, 1913, such earnings when distributed in liquidation being subject to the surtax and exempt from the normal tax. The following quotation is taken from our opinion in that case:
* * * Congress [in the Revenue Act of 1921] 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 distributions*2008 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 or 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 respondent claims that the instant case comes within this ruling, which has been cited with approval and followed in many decisions of the Board, including ; ; *2009 ; ; .
*1175 The deficiency asserted by the respondent is based on the theory that the entire distribution of $312,500 made in 1923, of which amount the petitioner received $112,500, was made out of earnings or profits accumulated since February 28, 1913. The respondent relies upon the fact that in the income tax return filed by the Poidebard Silk Products Corporation for the fiscal year ended November 30, 1923, Schedule L, Reconciliation of Net Income and Analysis of Changes in Surplus, contains the following:
| 8. Surplus and undivided profits as shown by balance sheet at close of preceding taxable period | $460,230.93 |
It is argued on behalf of the respondent that inasmuch as this item of $460,230.93 was reported as surplus and is in excess of the amount distributed in 1923, such distribution must be treated as a distribution in liquidation which is taxable as a dividend and not as a capital gain.
We do not agree with the respondent's position. We have found that the Poidebard Silk Products*2010 Corporation was organized in April, 1921, with an authorized capital of 10,000 shares of stock of no par value. This corporation purchased the assets and assumed the liabilities of the Poidebard Silk Manufacturing Company. No money was advanced, but for each share of stock of the Poidebard Silk Manufacturing Company the holder thereof received 5 shares of stock of the Poidebard Silk Products Corporation. There was a reorganization, within the meaning of section 202(c)(2) of the Revenue Act of 1921, which did not result in any gain or loss to the stockholders at the time the new corporation was organized. Although the new corporation took over all the assets of the old company in exchange for its stock, any undivided profits or earnings of the old company were not acquired as profits or earnings of the new corporation. Any amount appearing on the books of the old company as surplus or undivided profits, which was carried forward on the books of the new corporation as surplus, was a part of its capital, and in any event was nothing more than paid-in surplus.
It is recognized that if there had been any earnings of the new corporation, a distribution to the extent thereof would*2011 be taxable as a dividend under the Revenue Act of 1921, in accordance with the ruling in the Frank D. Darrow case, supra, but it must be remembered that there could have been no distribution from earnings or profits in the instant case, because the new corporation sustained an operating loss for each year it was in existence. As was said by the Board in the case of :
It is our opinion that in the case of a corporation organized subsequent to March 1, 1913, there can be no accumulated earnings or profits until an operating deficit is made good, and that the Glassell Development Company did not *1176 have in 1924 any accumulated profits or earnings from which to pay dividends. The distribution in question was, therefore, made out of capital and did not constitute income to the recipients.
See also , and cases cited therein.
In view of the foregoing, we are of the opinion that the respondent erred in taxing as a dividend the sum of $112,500 received by the taxpayer in 1923. The total amount received by the petitioner as a stockholder of the dissolved corporation*2012 should be applied against the cost of his stock. Any excess over cost is, under the provisions of the statute, taxable at normal and surtax rates in the year in which such excess is received. There is no deficiency for the year 1923.
Judgment will be entered for the petitioner.