*267 Decision will be entered for the petitioner.
Petitioner in 1932, with other officers of a corporation, in order to assist in strengthening the financial position of the company, donated certain stock, with the agreement, shown on minutes of a directors' meeting, that in exchange for the stock they should receive a contingent claim for services rendered, to be paid in stock in the same amounts as were donated when the company was financially able to pay. In 1933, in connection with a recapitalization, each donor received a share of new stock, of lower par value, for each share donated. In 1941 the petitioner received, in completion of repayment for the stock donation, a credit of $ 30,130 on his subscription for about $ 104,000 of the corporation's stock and received stock, along with other stock. Held, the $ 30,130 was not a taxable dividend under section 115 (a) and (b) of the Internal Revenue Code.
*270 In this case there is involved income tax for the calendar year 1941. Deficiency was determined in the amount of $ 16,257.25, only a part of *268 which is in issue, since no error is assigned on some of the items involved in the determination. The only error assigned is that of the Commissioner in setting up as income to the petitioner $ 28,816.82 as an "unreported dividend." The question presented to us is, therefore, whether the petitioner received in 1941 a taxable dividend from the Moorlane Co. From evidence adduced we make the following findings of fact.
*271 FINDINGS OF FACT.
The petitioner resides in Oklahoma and his Federal income tax return for 1941 was filed with the collector for the district of Oklahoma.
Petitioner was in 1932 the principal stockholder in and president of the Moorlane Co., a corporation chartered under the laws of Oklahoma in 1929 and having its principal place of business in Tulsa, Oklahoma. Its stock then had a par value of $ 100 a share. All stock had been issued for cash, services, or its equivalent. The company was in financial difficulties and it became necessary for the officers to contribute capital back to the company. On July 8, 1932, Egon Koehler, S. D. Hunt, and petitioner, the directors of the company, signed a call and waiver of notice of a special meeting of the directors*269 for that date. Among the purposes of the meeting stated in the waiver and call was:
4. To confirm the purchase of the company's common and preferred stock for the treasury in accordance with plan to reduce capital deficit by a reinstatement of capital assets.
The directors' meeting was held on July 8, 1932. The minutes, in material part, recite that:
8. To assist the company in strengthening its financial position during this period of business depression, the following changes in the company's capital structure and other business procedures were proposed by the president and by motion duly made, seconded and carried were approved and ordered to be made a part of these minutes.
Among the procedures listed as so approved is the following:
[8] "(g) The company accepted as a donation from the following officers, shares of its preferred and common stock as listed below, giving them in exchange a contingent claim for services rendered, to be paid in stock in the same amounts as were donated. These claims to be contingent upon the company and to be paid from surplus earnings without impairing the company's surplus account below the amount of Five Thousand Dollars ($ 5000.) and *270 the claims to become valid only if, as, and when this condition exists as indicated by the company's certified annual or semiannual audits.
| Lynn C. Converse | Donated 10 shares Preferred |
| Egon Koehler | Donated 28 shares Common |
| Wm. D. Moorer | Donated 103 shares Preferred -- 164 shares Common |
If, as, and when the company is in a position to pay the above claims in stock for services rendered, they shall be paid in the order preference as listed below unless by mutual agreement of the parties concerned and with the approval of the Board of Directors the order of precedence of claims may be changed."
Paragraph 10 of the minutes of the directors' meeting reads:
*272 10. The Secretary and Treasurer was directed to give the elements of all of these transactions to the company's auditor, Mr. C. W. McAllister, with instructions to prepare a consolidated balance sheet and a profit and loss statement for the first six months of 1932, taking into account all of the above transactions and recording the results in these minutes for record.
The balance sheet so prepared, as of June 30, 1932, "after giving effect to the above changes in capital structure," did not list as liabilities any*271 obligation to repay the "contingent claim for services rendered" mentioned in paragraph 8 (g) of the minutes and hereinabove set forth. It showed authorized and outstanding common stock to be $ 50,000 less $ 35,400 in treasury, leaving $ 14,600 common, and showed preferred stock authorized to be $ 50,000 with $ 38,700 unissued, leaving $ 11,300, less "in treasury $ 11,300.00" leaving nothing.
The minutes of July 8, 1932, referred to a letter from the president, Wm. D. Moorer, to the stockholders (including the directors) and bearing their signatures, "signifying approval of these transactions." The letter, dated June 30, 1932, is on the subject: "Change in the Moorlane Company's Capital Structure in order to improve condition of financial statement as of June 30, 1932." In material part, it recites the company's pressing financial condition, and proceeds:
* * * Two logical transactions are suggested.
A. To reduce the par value of our stock from $ 100.00 to some lower amount.
B. To have each stockholder donate back to the treasury a certain number of his shares, receiving in return and for services rendered a contingent claim upon the treasury for reissuance of the same number of *272 shares donated, if, as, and when it can be accomplished out of earnings without lowering the company's surplus account below some fixed amount, say $ 5,000.00.
The first proposition does not appeal to me, for the reason that it depreciates the real value equity of the stockholders who have put actual cash into the business. The second proposition appeals to me as the most satisfactory.
The plan is then set forth in detail. In material part it is stated:
Most of the company's capital represents stock issued against salaries paid during the period of profitable business, 1929-1930. * * *
* * * *
[The actual cash put into the company is shown to be $ 15,950.75, $ 13,274.42 being put in by the petitioner. Net worth as of June 30, 1932, is stated to be $ 16,500.38.]
My idea is to set up this net worth in the company's statement without a capital deficit and with a surplus approximately sufficient to warrant operation through the year without a deficit, to be accomplished by the individual stockholders donating shares to the treasury as previously outlined.
A schedule of "donations" of stock, by petitioner and others, with the result, is set forth, as follows: *273
| Will Donate to | ||
| Treasury | Will Retain | |
| Converse | 10 Pfd | 25 Com |
| Moorer | 164 Com | |
| 103 Pfd | 100 Com | |
| Koehler | 28 Com | 10 Com |
| Hunt | 1 Com | |
| Bonus Trust | 10 Com |
| Stock Credit originally | Stock Credit originally | |
| recd. for cash | recd. for salaries, | |
| div., adj., etc. | ||
| Converse | 25 Comm | 10 Pfd. |
| Moorer | 132 Com | 132 Com. |
| 0 | 103 Pfd. | |
| Koehler | 0 | 38 Com. |
| Hunt | 0 | 1 Com. |
| Bonus Trust | 10 Com | 0. |
| RESULTING CAPITAL & SURPLUS ACCOUNT AFTER DONATIONS | ||
| Converse | 25 Com | $ 2,500.00 |
| Moorer | 100 Com | 10,000.00 |
| Koehler | 10 Com | 1,000.00 |
| Hunt | 1 Com | 100.00 |
| Bonus Trust | 10 Com | 1,000.00 |
| 146 Com | $ 14,600.00 | |
| Surplus | 1,900.00 | |
| Net Worth as of June 30, 1932 | 16,500.00 |
The contingent claims, in consideration for donations, for reissue of stock will be entered in the minutes as follows, listed in the order of priority which stock will be reissued.
* * * *
If this plan can assist the company in fighting through this period of business depression and, it and the options mentioned above are finally consummated, ultimate ownership of the company will appear as follows: * * * after which follows a list of stockholdings, including Moorer, with 264 common and 103 preferred. Then follows:
In the past three months under the management's plan, to keep expenses within the income, employees have waived a portion of their fair salaries, and during the*274 next few months they may again be called upon to do this. It is my idea to keep a record of the unpaid amounts of what might be considered a fair salary and to pay them out of future earnings, making a record in the minutes of the directors meetings of all accruals and payments. The amount of salary accruals will be passed upon by Messrs. Moorer, Koehler, and Hunt. The accruals will stand as contingent claims against the company, if, as, and when authorized by the Board of Directors, and it is my idea that they should be paid before the reissue of any stock under the plans outlined above.
A special meeting of the stockholders of the Moorlane Co. was held July 19, 1933. The petitioner acted as chairman. It was resolved that whereas the stockholders desired to surrender for cancellation certain stock theretofore issued out of surplus and to reduce outstanding capital stock liability, with assurance of reissuance of such stock at such future time as net earnings and surplus may justify, Moorer, Egon Koehler, and S. D. Hunt shall surrender for cancellation the stock issued to them from surplus, they to have right to a subsequent issuance of stock to them, from future surplus created*275 by earnings, one *274 share for each share surrendered. S. D. Hunt had not donated any stock in 1932. It was also resolved to reduce authorized capital stock from $ 100,000 to $ 50,000, and par value of stock from $ 100 to $ 10, consisting of 2,500 shares at $ 10 par value, for both common and preferred. It was then resolved that all stock then outstanding be surrendered for cancellation and that the new $ 10 par stock be issued on the basis of six shares for each share surrendered. It was also resolved to pay fully certain adjusted compensation, for which certain officers (who were Moorer, Egon Koehler, and S. D. Hunt, the directors) were entitled to receive stock, by issuance to them of new stock of $ 10 par value "on the basis of 1/10 in total amount as to the amount of liability to such officers * * *." The resolution did not mention the stock surrendered in 1932. The amount of liability to the officers and the amount of stock surrendered on that date was shown by an auditor's report, dated July 20, 1933, which showed that Wm. D. Moorer, on July 30, 1932, had 285 shares of common stock and 103 shares of preferred, that on June 30, 1932, 185 shares of common and 103 shares*276 of preferred "was donated [by Moorer, 28 shares common by Koehler, and 10 shares preferred by Converse] to the Company in order that the capital of the company might not be impaired by written agreement of the stockholders concerned." The audit report also showed that the treasury held 141 shares; that as of July 20, 1933, "there was a financial reconstruction of the capital structure of the company" effected by decreasing the authorized capital stock (from $ 100,000 to $ 50,000, as above described); and that on December 31, 1932, the treasury held 364 shares. The 213 shares of common donated by petitioner and Koehler went into the treasury. The auditor's report further showed that on July 20, 1933, there were "due and unpaid accrued salaries" to Moorer, $ 6,070, and that 61 shares of common stock were issued to him in payment thereof (while 39 shares were issued to Koehler and Hunt for about $ 3,900 salaries due them); and that in connection with the issuance of 6 shares of new stock for each share of old stock, Moorer donated 21 shares of common for which no new stock was issued. New stock issued to Moorer and the other stockholders showed issued to Moorer 61 shares of common*277 for accrued salaries and 164 shares of common "for donated stock"; also 103 shares of preferred "for donated stock." The surplus account of the corporation was credited with $ 18,500 for common stock and $ 10,300 for preferred stock "donated by Wm. D. Moorer" and $ 1,640 new common stock and $ 1,030 new preferred was issued to him "for donated stock" and $ 4,000 new stock issued to him for old stock. These transactions, with like entries as to Egon Koehler and S. D. Hunt, resulted in "net *275 increase in surplus -- $ 34,907.21," of which $ 30,130 was contributed by Moorer. The auditor's report concluded as follows:
All Capital Stock issued and outstanding at the time of the financial reorganization of the Company was acquired, either for cash, in payment of accrued salaries, or dividends properly authorized, or property taken at a fair value. No capital stock was issued without the Corporation receiving the par value thereof in full.
In connection with the above described recapitalization made in 1933, Converse was eliminated from the company. On a settlement he received credit for 10 shares of the new $ 10 par stock for the 10 old shares donated by him, and 150 shares of*278 the new $ 10 stock for his 25 shares of old stock. The settlement involved Moorlane's claim against Water Mining Corporation, of which Converse was general manager, which was offset by Converse's release of his stock and stock donation claim under the agreement of 1932.
The amounts of stock contributed, and received back, by the petitioner are:
| Contributed in 1932 (common, 164 shares) | $ 16,400 | |
| Contributed in 1932 (preferred, 103 shares) | 10,300 | |
| Contributed in 1932 or 1933 (21 shares) | 2,100 | |
| Contributed in 1933 (40 shares) | 4,000 | |
| [By reason of reduction of $ 100 stock to $ 10 and | ||
| issuance of 6 shares for one, on the 100 shares | ||
| retained by petitioner.] | ||
| Total | 32,800 | |
| Received in 1933, 164 shares common at $ 10 | $ 1,640 | |
| Received in 1933, 103 shares preferred at $ 10 | 1,030 | |
| Total | 2,670 | |
| Petitioner's net contribution to surplus | 30,130 |
Early in 1941 petitioner was advised that the corporate surplus was in such condition that the corporation could fulfill its promises. He instructed his associates to check the record and to reissue to him the stock previously contributed by him.
On December 29, 1941, a special meeting of the board of directors*279 was held. In pertinent part the minutes read:
By resolution unanimously adopted, the Board of Directors approved and authorized a debit against surplus and a credit to Wm. D. Moorer's stock subscription account, in the amount of $ 30,130.00. This amount represents contributions to surplus made by Wm. D. Moorer during the depression years of 1932 and 1933. Verification of this transaction has been made by C. W. McAllister & Company, Public Auditors, and declared to represent Wm. D. Moorer's personal contribution to surplus during that time.
At that time petitioner and his immediate family owned all the *276 stock of Moorlane Co. In the latter part of 1941 $ 30,130 was debited to the corporation's surplus, as contributed surplus, and credited to petitioner's purchase of stock, and stock was issued to him for the amount of $ 30,130, along with the other stock, though he did not receive a separate certificate for $ 30,130 in stock.
The Commissioner in the notice of deficiency added $ 28,816.82 to petitioner's income, with the following explanation:
During the taxable year you purchased from Moorlane Company, Tulsa, Oklahoma, a corporation of which you are the principal stockholder, *280 10,466,015 shares of its $ 10.00 par value common stock for a consideration of $ 104,660.15. The purchase price was paid by a credit of cash dividends due you of $ 3,139.80, a credit of $ 30,130.00 out of the corporation's surplus, and your note for $ 71,390.35. It is held that the $ 30,130.00 credit is a taxable dividend to the extent of $ 28,816.82, the amount of the corporation's earnings and profits for the year not otherwise distributed. The amount of $ 28,816.82 not otherwise distributed is computed as follows:
* * * *
On brief the respondent concedes that the $ 28,816.82 should be reduced to $ 27,972.96. This is because of the additional income tax assessed by the State of Oklahoma in the amount of $ 843.86.
OPINION.
The primary question presented to us is simple: Was the $ 30,130 a dividend (to the extent of corporate earnings, $ 27,972.97)? The Commissioner so determined, and the petitioner must demonstrate to the contrary. The respondent's argument on the principal question is equally simple. He argues briefly that under section 115 (a) of the Internal Revenue Code a dividend is defined to be any distribution made by a corporation to its shareholders out of earnings*281 and profits, while under section 115 (b) "every distribution is made out of earnings and profits to the extent thereof." Hence, says the respondent, the amount credited to petitioner's stock purchase account (i. e., the $ 30,130) to the extent of available earnings $ 27,972.96) is to be deemed a dividend distribution as determined, "unless he can affirmatively establish its character as a loan." The petitioner's position is that the amount was repayment of such loan. The parties do not differ as to figures.
The respondent relies primarily upon Leland v. Commissioner, 50 Fed. (2d) 523, and Rheinstrom v. Connor, 125 Fed. (2d) 790. In the former, stockholders contributed quick assets as paid-in surplus, without the giving of notes to evidence obligation. Later corporate distributions in cash were authorized, to be paid out of the paid-in *277 surplus. It was held there was a dividend, not repayment of loan. In the Rheinstrom case capital was reduced by $ 122,000 and the amount credited to earned surplus and later transferred to paid-in surplus. Years later $ 122,000 was distributed to the stockholders*282 and the paid-in surplus account was canceled. Earnings in the year of distribution were greater than the amount distributed. It was held that there was dividend, not return of capital or repayment of debt, as argued by the stockholders.
The weakness of the two cases to support the respondent's argument is apparent: Neither involved any promise or agreement to pay back the contributions made by the stockholders. Since here the petitioner relies flatly upon an agreement shown by the directors' resolutions of July 8, 1932, the two cases offer no help on the problem.
The petitioner, on his part, relies strongly on Weaver v. Commissioner, 58 Fed. (2d) 755. Therein the stockholders, in order to increase the corporation's working capital, paid in $ 100,000, in proportion to stock. A verbal understanding existed among the stockholders that at some future date the sum contributed would be returned to them. The $ 100,000 was kept separate, in an account called "contributed surplus" and used in the corporate business. Several years later, by resolution, it was repaid to the stockholders. The court held that there was not a dividend, as contended by the*283 Commissioner, but a loan, repaid, and that the stockholders did not receive taxable income. It is clear from the facts in that case that it is like this one, in that there is the element of agreement to return the contribution, as alleged in this matter, but that, unlike this case, no stock was there involved, there being merely loan of money, later repaid.
After study of the facts here we are of the view that, though stock and not money, as in the Weaver case, was here "donated" to the corporation, that case is soundly applicable here. There can be no doubt that we have in this matter an agreement to make restitution for what was contributed, and not a mere contribution to surplus as in the Leland and Rheinstrom cases; and the fact that the matter starts with stock, instead of money as in the Weaver facts, seems no distinction. The agreement as shown by the minutes of July 8, 1932, was that there was "donation" of stock by the stockholders "giving them in exchange a contingent claim for services rendered to be paid in stock in the same amounts as were donated." There is thus, despite the repeated use of the words "donation" or "donated," no escape from the conclusion*284 that there arose an obligation on the part of the corporation, to pay, in stock, a claim for which the stock was exchanged. The respondent *278 does not argue that the claim payable was one for services rendered, apparently considering that because it was payable in stock it was a claim for stock, and we, therefore, so consider the matter. We conclude that there was an agreement for return of stock. The facts show that the "donated" stock went into the treasury of the corporation.
We must next consider the matter of how the obligation was met, in 1941, passing for the moment the effect of the transaction in 1933. What happened in 1941 may be viewed in two lights: Either as payment in money, because of credit given for $ 30,130 on petitioner's subscription for approximately $ 104,000 in stock; or as return of the stock, in that petitioner did actually receive a stock certificate, for the whole amount subscribed for, and, therefore, in a sense at least, received such certificate to the extent of $ 30,130 of the subscription price, in return for the stock turned in to the treasury in 1932. In our view, the result was not such distribution as to be taxable dividend; for the *285 petitioner received stock as provided by the agreement in 1932. It is to be noted that there was no agreement to return the identical stock "donated," but only that in payment of the "claim for services rendered" he receive "stock in the same amounts as were donated." He donated both common and preferred stock, but could be repaid, for the claim, in "stock." Since he received stock (and he did receive a certificate including coverage of $ 30,130 in stock without paying for it in 1941), we consider that, in the light of the agreement in 1932 for return of stock, the Weaver case is sound authority that there was no dividend. He did not, under the facts found here, merely contribute to surplus without agreement for return or reimbursement, as in the Rheinstrom and Leland cases. The respondent's argument impliedly agrees that, if there was loan, the satisfaction thereof did not result in a dividend; and, in our view, there was such loan agreement. See George P. Pitkin, 31 B. T. A. 403; W. T. Wilson, 10 T.C. 251">10 T. C. 251.
There remains for consideration respondent's argument that the effect of the transaction in 1933 *286 was to wipe out the agreement made in 1932, because petitioner then received, share for share, stock instead of that "donated" in 1932. We do not regard the argument as valid. The agreement of 1932 did not say that stock should be returned share for share, but only that the claim be "paid in stock in the same amounts as were donated," and on brief the respondent agrees that the "basis originally agreed upon * * * was that the face amount of the shares would be returned * * *," but argues that "the recapitalization satisfied the prior obligation on the basis of share for share." Return of one share of new $ 10 par stock, after the recapitalization *279 in 1933, for each of the $ 100 shares "donated" in 1932 clearly did not discharge the obligation in the agreement. The fact that Converse was eliminated as to his contribution, by an equal number of shares of the new $ 10 stock, is, in our view, neither controlling nor important, for that was the result of a settlement of matters in which he was interested, including Moorlane's claim against another company, of which he was general manager, which claim was discharged by Converse's turning in his stock and his rights under the *287 agreement of 1932. What he saw fit to accept at that time for his claim does not help on the question here. In our opinion, the claim for return of stock in the amounts "donated" in 1932 was properly credited, as the petitioner argues, with the stock received in 1933, leaving $ 30,130 in stock still due to the petitioner. The partial payment of an obligation is not compensation for full release thereof, under law so well settled as not to require citations. Moreover, current treatment by the parties involved is to be considered, and there is nothing in the transaction in 1933 to indicate that it covered surrender of the previous right of Moorer and Koehler under the agreement of 1932. The resolution in 1933 as to reissuance of stock share for share was passed prior to reduction of the par value of the stock to $ 10, and it applied to stock to be surrendered, not stock already surrendered. In addition it is to be noted that S. D. Hunt is included among those named in the resolution on this point, and that he had not contributed any stock in 1932. Again, the resolution was to surrender "certain shares of stock * * * issued to them out of the surplus of the company * * *." So far*288 as the record here shows, on July 19, 1933, Moorer and Koehler, so far as the "donated" stock was concerned, had been issued nothing out of surplus. On the contrary, they had surrendered 213 shares, and it was in the treasury. The resolution did not mention the stock surrendered in 1932.
Moreover, there was no consideration, if there had been any agreement to take one share of $ 10 stock instead of a share of $ 100 stock. We do not read the resolution as so providing, or as covering the stock surrendered in 1932, but as concerning some other stock, issued to Hunt, Moorer, and Koehler, and not otherwise appearing in this record.
We conclude and hold that the petitioner did not in 1942 receive a dividend from Moorlane Co. by virtue of the credit upon stock subscription by him and receipt of stock by him.
Decision will be entered for the petitioner.