*826 Prior to and during each of the taxable years 1934 and 1935 petitioner made short sales of both the common and class A stocks of the Coca-Cola Co. These short sales were closed out during the taxable years. On the date petitioner closed out these short sales he exchanged both common and class A stocks of the Coca-Cola International Corporation for common and class A stock, respectively, of the Coca-Cola Co. for the purpose of using the latter stocks to close out his short position. The International stocks so exchanged were permanently retired. Held, that the exchanges of petitioner's International stocks for Coca-Cola stocks represented "amounts distributed in partial liquidation" of International, as that term is used in section 115(c) and defined in section 115(i) of the Revenue Act of 1934; that 100 percent of petitioner's gain should be taken into account in computing net income as provided in section 115(c), rather than 30 percent thereof as contended for by petitioner; and that the transactions can not be regarded as in essence sales of the International stocks, for to do so would necessitate the disregard of the exchanges and the statutory tax consequences thereof. *827 Gus T. Dodd,46 B.T.A. 7">46 B.T.A. 7, and Estate of Emanuel Ulman,46 B.T.A. 517">46 B.T.A. 517, followed.
*727 This is a petition for a redetermination of deficiencies in income tax determined by the respondent against petitioner for the calendar years 1934 and 1935 in the amounts of $35,759.46 and $13,674.61, respectively.
The deficiencies are due to several adjustments, but the assignments of error pertain only to the adjustments made by the respondent relative to certain exchanges made by petitioner during the taxable years of both common and class A stocks of the Coca-Cola International Corporation for both common and class A stocks, respectively, of the Coca-Cola Co., which exchanges were made for the purpose of using the latter stocks to close out certain short sales of both the common and class A stocks of the Coca-Cola Co. made by petitioner prior to and during each of the taxable years involved. It is petitioner's position that there was no partial liquidation upon the exchanges made by him of his International stocks for Coca-Cola*828 stocks; that the exchanges were but transitory steps in covering the short sales, amounting, in essence, to sales of the International stocks, which petitioner had held for over ten years; that he realized a net gain upon each closing out of a short sale (instead of a gain first on the exchange and then a loss on the closing out of the short sale); and that only the percentages of such *728 gain provided in section 117 of the Revenue Act of 1934, are to be taken into account in computing his net income. The respondent determined and contends that the surrender by petitioner of his International stocks for Coca-Cola stocks represents distributions in partial liquidation of International and that, in accordance with section 115(c) of the Revenue Act of 1934, "despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income." The assignments of error originally placed in issue the question of "basis" of the International stcoks exchanged, but this has now been settled by stipulation, wherein petitioner agrees that the basis used by the respondent was correct. In short, the parties agree upon the net gain resulting*829 from the said transactions but differ only as to the percentage of the net gain that is to be taken into account in computing net income. Petitioner contends that only 30 percent of such resulting net gain should be taken into account, whereas the respondent contends that 100 percent should be taken into account.
FINDINGS OF FACT.
Petitioner is an individual, residing in Columbus, Georgia. He filed his returns for the calendar years 1934 and 1935 with the collector of internal revenue for the district of Georgia.
Facts with Respect to the Coca-Cola Co.
The business of Coca-Cola first started in a small way about 1888 in the city of Atlanta, Georgia. It was incorporated shortly thereafter under the name of "Coca-Cola Company", a Georgia corporation, with an authorized capital stock of 500 shares with a par value of $100 each.
The present corporation, "The Coca-Cola Company" (herein sometimes referred to as Coca-Cola), was formed on September 5, 1919, under the laws of the State of Delaware, with an authorized capital stock of 500,000 shares of no par value common and 100,000 shares of $100 par value 7 percent preferred. The common shares were sold for cash. On*830 September 11, 1919, "The Coca-Cola Company" acquired all the properties of "Coca-Cola Company" at a purchase price consisting of cash of $15,000,000 and 7 percent preferred stock of $10,000,000.
During 1925 and 1926, $4,000,000 and $6,000,000, respectively, of the 7 percent preferred stock was retired, leaving only the common stock outstanding.
On March 3, 1927, Coca-Cola amended its charter and issued a 100 percent stock dividend in common stock so that there were then outstanding *729 1,000,000 shares of no par value common stock, and none other.
On December 8, 1928, Coca-Cola amended its charter to authorize the issuance of 1,000,000 shares of $3 cumulative class "A" stock and directed that this stock be distributed to the stockholders of record as of January 15, 1929.
As of January 15, 1929, Coca-Cola, pursuant to the foregoing, issued a stock dividend consisting of one share of $3 cumulative class A stock for each share of common then outstanding, so that the capital structure then stood, authorized and issued, 1,000,000 shares of common, no par value, and 1,000,000 shares of cumulative class A, redeemable at $52.50 per share, plus accrued dividends, through*831 call by lot or purchase as a whole or in part on any dividend paying date on 30 days' notice, as provided for in the certificate of incorporation as amended. Both common and class A, at all times material, were listed on the New York Stock Exchange.
Facts with Respect to the Coca-Cola International Corporation.
The "Coca-Cola International Corporation" (herein sometimes referred to as International) was formed on November 18, 1922, under the laws of the State of Delaware, with an authorized capital stock of 251,000 shares of no par value common, as a holding corporation to carry on the functions of a preexisting voting trust among the majority stockholders of Coca-Cola. At the time of organization it issued one share of its own capital stock for each share of Coca-Cola common stock transferred to it until it held 251,000 of the 500,000 shares of Coca-Cola common stock then outstanding. On February 9, 1926, the board of directors of International passed an irrevocable resolution whereby its stockholders might at any time exchange their shares, plus a small exchange fee, for the same number of shares of Coca-Cola. On February 13, 1926, the stockholders of International held*832 a special meeting and unanimously adopted the following resolution:
Be It Resolved, That pursuant to the provisions of the resolutions so adopted by the Board of Directors and this day ratified, approved, confirmed and adopted by the Stockholders, the capital stock of this Company be and hereby is reduced to the extent that shares of stock of this Corporation may be exchanged for shares of stock of The Coca-Cola Company, as provided in said resolution; and as such reduction is accomplished by such exchange of shares the shares so exchanged and as exchanged, hereby are retired until all of the Common Capital Stock of the Company, if exchanged, has been so retired.
Pursuant to the above resolutions of February 9 and 13, respectively, International, on March 20, 1926, filed with the office of Secretary of State of the State of Delaware a "Certificate of Amendment of *730 Certificate of Incorporation" which, after setting out in full such resolutions, stated:
That the provisions of the Laws of the State of Delaware relating to the reduction of the capital stock of a corporation organized under its laws were in all other respects fully complied with, including the payment*833 of all the Corporation's debts not otherwise fully secured, and the reduction of the capital stock is accomplished as provided for in such resolutions.
When Coca-Cola issued the common stock dividend on March 3, 1927, International received 243,355 shares of Coca-Cola common stock. International did not make any corresponding increase in its own outstanding capital, but thereafter, by appropriate action taken on the part of International, one share of International common could be turned in to the corporation for two shares of Coca-Cola common.
When Coca-Cola amended its charter so as to authorize the issuance of 1,000,000 shares of $3 cumulative class A stock to be distributed to its stockholders of record January 15, 1929, International received 457,712 shares thereof as its proportionate amount.
Pursuant to authorizations of its directors and stockholders at a special meeting held on December 18, 1928, International, on December 29, 1928, filed with the office of Secretary of State of the State of Delaware a "Certificate of Amendment of Certificate of Incorporation" whereby article fourth of the original certificate of incorporation was stricken and a new article fourth*834 was substituted therefor, the purpose being to authorize in addition to the common stock outstanding the same number of shares of a "special stock to be designated and known as Class A stock." This class A stock was nonvoting, except upon default of dividends; was to pay yearly dividends at the rate of $6 per share; and at the option of the board of directors was "subject to call or redemption on any dividend-paying date after date of issue, at the price of One Hundred and Five ($105.00) Dollars per share, plus dividends accumulated and unpaid thereon, upon such notice and in such manner as may be provided by the Board of Directors in its sole discretion and in accordance with law."
On December 18, 1928, the directors of International held a meeting and adopted certain resolutions, in part, as follows:
Now, Therefore, Be It Resolved First: That a stock dividend be and hereby is declared by this Company and that there be distributed to the holder of each outstanding share of common stock of this Corporation the same number of shares of Class A stock as he holds of such common stock, to bear date as of January 1, 1929, to be issued to stockholders of record on January 18, 1929, and*835 to be determined by the number of shares of common stock on that date outstanding.
Pursuant to the above resolutions of December 18, 1928, the class A stock referred to therein was issued to the International stockholders of record as of January 18, 1929.
*731 After the payment of the stock dividend in class A stock by Coca-Cola, International held as assets two shares of Coca-Cola common for each share of its own common outstanding, and two shares of Coca-Cola class A stock for each share of its own class A stock outstanding.
On February 5, 1929, the directors of International passed a resolution the material provisions of which are as follows:
Whereas, this Company has recently received from The Coca-Cola Company a stock dividend composed of 457,712 shares of The Coca-Cola Company Class "A" Stock, being double the number of shares in Class "A" Stock that this Company now has outstanding of Common Stock; and,
Whereas, pursuant to actions of this Company heretofore taken relative to the exchange of the capital stock of this Company for stock of The Coca-Cola Company owned by this Company, it is desirable that the same apply equally to an exchange of the Class "A" *836 Stock of this Company for Class "A" Stock of the Coca-Cola Company.
Be It Therefore Resolved, First: That upon the presentation of any share of Class "A" Stock of this Company by the holder thereof, properly endorsed, plus nineteen (19??) cents per share, if exchanged in New York City, and fifteen (15??) cents per share if exchanged in Atlanta, Georgia, to cover all expenses incurred or required, including governmental taxes, the Officers of this Company are directed, upon the request of such holder, to deliver to him, properly endorsed, two shares of the Class "A" Stock of The Coca-Cola Company from the shares of such stock of that Company now held by this Corporation.
* * *
Third: That all such shares of this Company received in exchange shall be cancelled and retired.
The provisions of the above resolution of February 5, 1929, relative to the ratio of delivery of Coca-Cola class A shares for International class A shares continued at all times from 1929 through the taxable years 1934 and 1935.
The shares of International common and class A here in question and hereinafter referred to which were delivered to International in exchange for shares of Coca-Cola common and*837 class A, respectively, were permanently retired by International.
Facts with Respect to Stock Disposed of by Petitioner.
During the years 1919 to 1922, inclusive, petitioner acquired 1,380 shares of Coca-Cola common stock on the following dates, with the number of shares and the cost thereof set opposite thereto:
| Date | Shares acquired | Cost |
| 9-13-19 | 86 | $3,316.38 |
| 9-15-19 | 100 | 3,856.25 |
| 10-13-19 | 100 | 3,956.25 |
| 1-13-20 | 25 | 984.38 |
| 8-12-20 | 50 | 1,750.00 |
| 10-18-21 | 25 | $871.88 |
| 2-19-21 | 494 | 10,497.50 |
| 10-10-22 | 500 | 38,825.00 |
| Total | 1,380 | 64,057.64 |
*732 On January 10, 1923, petitioner exchanged the said 1,380 shares of Coca-Cola common stock for 1,380 shares of International common stock.
On January 15, 1929, petitioner owned certain shares of International common stock, including the 1,380 shares set forth above, on which he received as a stock dividend one share of International class A stock for each share of International common stock which he owned.
The market value of International common and class A stocks on January 15, 1929 (the date the latter was distributed as a dividend) was $263 and $99, respectively. Under the Revenue Act*838 of 1934, as amended by section 214(e) of the Revenue Act of 1939, the cost basis of the stock in respect of which the distribution was made must be apportioned between such stock and the stock so distributed to petitioner. In determining the deficiency, the respondent correctly determined that 27.348 percent of such basis should be allocated to the class A stock received as a dividend.
On January 1, 1934, petitioner owned the said 1,380 shares of International common stock and the said 1,380 shares of International class A stock and it has been stipulated that the total cost basis of those shares was $64,057.64. Allocating the $64,057.64, said stocks had a separate cost basis for subsequent gain or loss as follows:
| Number of shares | Percentage allocated | Amount allocated | Amount per share |
| Percent | |||
| 1,380 shares International common | 72.652 | $46,539.16 | $33.724029 |
| 1,380 shares International class A | 27.348 | 17,518.48 | 12.694551 |
| Total | 64,057.64 |
The respondent, in determining the deficiencies herein, correctly determined that prior to and during each of the taxable years here involved petitioner had made short sales of both Coca-Cola common and*839 class A stocks; that these short sales were closed out during the taxable years here involved; and that the short sales so made, the proceeds therefrom, and the dividends which petitioner was required to pay with respect to such short sales were as follows:
| 1934 | ||||
| Date sold | Date closed out | Proceeds | Dividends | |
| sale | paid | |||
| 1932-33 | 7/30/34 | 844 shs. C.-C. common | $86,895.49 | $11,820.70 |
| 1933-34 | 12/28/34 | 600 shs. C.-C. common | 69,832.00 | 3,292.50 |
| 1929 | 12/28/34 | 400 shs. C.-C. class A | 18,499.00 | 6,570.00 |
| 1935 | ||||
| 1933-34 | 4/2/35 | 500 shs. C.-C. common | $51,952.75 | $7,430.00 |
| 1933-34-35 | 4/17/35 | 225 shs. C.-C. common | 34,768.30 | 1,476.37 |
| 1929 | 2/19/35 | 200 shs. C.-C. class A | 9,362.00 | 3,285.00 |
*733 On the date petitioner closed out the foregoing short sales, petitioner exchanged International common and class A stocks with the transfer agent, registrar, or other authorized representative of International for Coca-Cola common and class A stocks for the purpose of using the latter stocks to close out his short position referred to above, in connection therewith paying in exchange a fee, and immediately delivering the Coca-Cola stock*840 for that purpose. The exchanges so made and the fees paid were as follows:
| Date | Shares of International exchanged | Shares of Coca-Cola received | Fee paid |
| 7-30-34 | 422 common | 844 common | $72.16 |
| 12-28-34 | 300 common | 600 common | 57.00 |
| 12-28-34 | 200 class A | 400 class A | 38.00 |
| 4-2-35 | 250 common | 500 common | 70.00 |
| 4-17-35 | 135 common | 1 270 common | 25.90 |
| 2-19-35 | 100 class A | 200 class A | 19.00 |
The common stock of International exchanged as set forth above, under the first in, first out rule, used by the respondent and agreed to by petitioner, represented a part of the 1,380 shares of International stock received by petitioner on January 10, 1923, and the International class A stock so exchanged represented a part of the International class A stock received by petitioner as a stock dividend on January 15, 1929.
Petitioner, in his return for the year 1934, reported a capital gain on the transactions in International and Coca-Cola stocks referred to above for that year in the amount of $110,679.70, and took into account $34,843.89 thereof for income tax purposes, under section 117 of the Revenue Act of 1934. *841 He also reported net capital losses of $4,648.21 from transactions in capital assets not here in question, so that the taxable capital gain reported by petitioner from all transactions in capital assets for the year 1934 amounted to $30,195.68.
The respondent determined that during 1934 petitioner exchanged 722 shares of International common (instead of 450 as reported by petitioner) and 200 shares of International class A; that he received in partial liquidation therefor 1,444 shares of Coca-Cola common and 400 shares of Coca-Cola class A; that the gain resulting from the partial liquidation amounted to $197,428.78 and that 100 percent thereof was recognized under the statute; that the loss resulting from the application of the shares received in exchange to the closing out of the short sales amounted to $70,944.71 and that 100 percent thereof was recognized under the statute; and that the net taxable capital gain on the transactions in International and Coca-Cola*734 stocks referred to above for the year 1934 was $126,484.07 instead of $34,843.89 as reported by petitioner.
The respondent also determined that, on the transactions in capital assets during the year 1934*842 not here in question, petitioner sustained net capital losses of $5,445.76 (instead of $4,648.21 as reported by petitioner), so that the net taxable capital gain from all transactions in capital assets for the year 1934 as determined by the respondent was $121,038.31, instead of $30,195.68 as reported by petitioner, or a net increase of $90,842.63.
Petitioner, in his return for the year 1935, reported a capital gain on the transactions in International and Coca-Cola stocks referred to above for that year in the amount of $55,982.35 and took into account $17,625.94 thereof for income tax purposes, under section 117 of the Revenue Act of 1934.
The respondent determined that during 1935 petitioner exchanged 385 shares of International common (instead of 135 as reported by petitioner) and 100 shares of International class A; that he received in partial liquidation therefor 770 shares of Coca-Cola common and 200 shares of Cola-Cola class A; that the gain resulting from the partial liquidation amounted to $150,617.55 and that 100 percent thereof was recognized under the statute; that the loss resulting from the application of the shares received in exchange to the closing out of the*843 short sales amounted to $72,020.82 and that 100 percent thereof was recognized by statute; and that the net taxable capital gain on the transactions in International and Coca-Cola stocks referred to above for the year 1935 was $78,596.73 instead of $17,625.94 as reported by petitioner.
Petitioner, in his return for the year 1935, also reported net capital gains of $317.31 from transactions in capital assets not here in question, so that the taxable capital gain reported by petitioner from all transactions in capital assets for the year 1935 amounted to $17,943.25. The respondent made no changes in these other transactions in capital assets not here in question, so that the net taxable capital gain from all transactions in capital assets for the year 1935 as determined by the respondent was $78,914.04, instead of $17,943.25 as reported by petitioner, or a net increase of $60,970.79.
Any part of the stipulation of facts, including the exhibits thereto, not specifically set forth herein is incorporated herein by reference and made a part of these findings of fact.
OPINION.
BLACK: In addition to the facts set forth in our findings, petitioner has requested that the Board specifically*844 make three findings as follows:
*735 19. The taxpayer disposed of his Coca-Cola International stock upon a sale or exchange thereof, as such term is used in section 112(a) of the Revenue Act of 1934.
20. There was no distribution of assets in partial liquidation by Coca-Cola International Corporation, as that term is used in section 115(i) of the Revenue Act of 1934.
21. The exchange of International stock for Coca-Cola stock and the immediate delivery of the latter to close out the short sale constituted a single transaction resulting in a sale or exchange of International stock.
To state these three requested findings is, likewise, to state the three points of petitioner's argument. They are the same. For reasons which we shall presently state, we are unable to make the three special findings requested by petitioner.
Prior to and during each of the taxable years 1934 and 1935 petitioner made certain short sales of both common and class A stocks of Coca-Cola. At the outset it should be noted that these short sales were of Coca-Cola stocks and not of International stocks. For income tax purposes, a short sale is not deemed to be consummated until delivery*845 of property to cover the short sale. See article 117-6 of respondent's Regulations 86, set out in the margin. 1 How did petitioner cover his short sales of Coca-Cola stocks? He took some International stocks that he owned and delivered them, not to the short sale purchasers, but to International, and, in accordance with the irrevocable resolutions of the board of directors and stockholders of International dated February 9, 1926, February 13, 1926, and February 5, 1929, International delivered to petitioner for his International stocks twice the number of shares of Coca-Cola stocks, which latter stocks (with the exception of 45 shares of Coca-Cola common received delivery of property to cover the short sale. See article 117-6 of on April 17, 1935) petitioner delivered to the short sale purchasers to close out his short position. The shares of International which petitioner delivered to International were, in accordance with the resolutions just referred to, permanently retired by International. The fair market value of the shares of Coca-Cola stocks thus received by petitioner for his International stocks represented "amounts distributed *736 in partial liquidation" of*846 International as that term is used in section 115(c) and defined in section 115(i) of the Revenue Act of 1934. 2; ; . Cf. .
*847 Petitioner emphasizes the fact that it has been stipulated that petitioner exchanged his International stocks with International for twice the number of shares of Coca-Cola stocks "for the purpose of using the latter stocks to close out his short position" and that the exchange and covering occurred on the same date. He contends that because of this fact the delivery of International stocks to International for Coca-Cola stocks should not be treated as a separate transaction, but that in substance there was only one transaction, namely, a sale of International stocks for cash. In support of this contention petitioner cites and relies upon the same line of cases 3 that the petitioners in the Dodd and Ulman proceedings relied upon. In those cases we held that the exchange of International stock with International for Coca-Cola stock was one of the material facts in those cases and that it could not be disregarded. To disregard the exchange would be to treat it as if it did not occur when in fact the International stocks were turned in to International and by it retired, the petitioner receiving in place of his International stocks twice the number of shares of Coca-Cola*848 stocks. We think such a turning in of International stocks to International for Coca-Cola stocks and a retirement of such International stocks in accordance with the resolutions above mentioned plainly amounts to a distribution in partial liquidation of International. If we were to hold otherwise, there never would be a distribution in partial liquidation of International with respect to the International stocks so turned in, for such stocks were, under the resolutions, to be permanently retired. Certainly there could never be a distribution in partial liquidation of International as far as the purchasers of the short *737 sales were concerned, for they never had International stocks delivered to them, but received that which they purchased, namely, Coca-Cola stocks. We hold, therefore, as we held in the Dodd and Ulman cases, that the exchange of International stocks with International for Coca-Cola stocks can not be disregarded and that there resulted a distribution to petitioner of Coca-Cola stocks in partial liquidation of International. Section 115(c), supra, provides how amounts distributed in partial liquidation of a corporation shall be treated. Under*849 this section, which we regard as mandatory, we think the respondent was correct in determining that 100 percent of the gains of $197,428.78 and $150,617.55 for the years 1934 and 1935, respectively, should be taken into account in computing net income.
On the same day that petitioner received the Coca-Cola stocks in partial liquidation of International, he used all of such stocks (with the exception of the 45 shares of Coca-Cola common above mentioned) to close out his short position. The respondent determined that on this second transaction petitioner sustained losses of $70,944.71 and $72,020.82, for 1934 and 1935, respectively. The respondent has allowed 100 percent of these losses to be taken into account in computing net income under section 117 of the Revenue Act of 1934, the material provisions of which are as follows:
(a) GENERAL RULE. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
100 per centum if the capital asset has been*850 held for not more than 1 year;
* * *
(d) LIMITATION ON CAPITAL LOSSES. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *
(e) GAINS AND LOSSES FROM SHORT SALES, ETC. - For the purpose of this title -
(1) gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; * * *.
The net results of the two transactions, therefore, are gains of $126,484.07 and $78,596.73 for 1934 and 1935, respectively, 100 percent of which the respondent has taken into account in computing petitioner's net income. We hold that the respondent has arrived at the correct tax consequences and that his determination should be approved. ;Inasmuch as the other adjustments made by the Commissioner in the deficiency notice are not contested,
Decision will be entered for the respondent.
Footnotes
1. Only 225 applied on short sales. ↩
1. ART. 117-6. Gains and losses from short sales.↩ - For income tax purposes, a short sale is not deemed to be consummated until delivery of property to cover the short sale, and the percentage of the recognized gain or loss to be taken into account under section 117(a) from a short sale shall be computed according to the period for which the property so delivered was held. Thus, if a taxpayer made a short sale of shares of stock and covered the short sale by purchasing and delivering shares which he held for not more than one year, 100 per cent of the recognized gain or loss would be taken into account under section 117(a), even though he had on hand other shares of the same stock which he held for more than one year. If, however, he covered the short sale by delivering shares which he held for more than one year but not for more than two years, only 80 per cent of the recognized gain or loss would be taken into account. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the broker to replace the property borrowed by the broker.
2. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * *
(c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * *
* * *
(i) DEFINITION OF PARTIAL LIQUIDATION. - As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. ↩
3. See footnote 2 in ↩