*1220 Where the petitioners purchased certain shares of corporate stock shortly prior to the declaration of a dividend, which dividend they expected to be declared and which influenced them in the price which they paid for the stock, held, the Commissioner did not err in including in the taxable income of the petitioners for the year 1926 the full amount of the dividends received by them during that year.
*1239 These cases involve income tax liability of the petitioners for the year 1926, Marcus Frieder in the amount of $13,788.16 and Leonard P. Frieder in the amount of $11,191.86. The cases are consolidated for hearing.
FINDINGS OF FACT.
The petitioners are individuals, with their residence in New York City. Marcus Frieder is the father of Leonard P. Frieder. During the year 1926 they were president and vice president, respectively, of the Klots Throwing Company, a corporation, afterwards reorganized as the General Silk Corporation. The stock of the Klots Throwing Company was closely held, the petitioners being the largest stockholders. *1221 During the year 1926 each of the petitioners received dividends from the Klots Throwing Company in the amount of $68,924.45, of which each of them reported as gross income for *1240 that year only the sum of $18,059.52. In his determination of the deficiencies involved, the Commissioner increased the taxable income of each of the petitioners by the difference between the amounts so reported and the amounts of the dividends actually received, the increase in each case being $50,864.93.
During the years 1919 and 1920 the Klots Throwing Company sustained heavy losses. Its principal creditors were banks, which had advanced money to it for the carrying on of its business. The company was unable to meet its obligations and a reorganization was effected whereby the banking creditors accepted first notes but later capital stock of the company in lieu of its indebtedness to them. While this arrangement relieved the company of its current obligations, it greatly curtailed its credit facilities. For the years 1921 to 1925, the company's business showed a marked improvement, but due to the curtailment of its credit it was unable to expand as rapidly as was desirable. The company*1222 had not paid dividends since the year 1919, but had accumulated a surplus out of which back dividends were contemplated being paid.
During the year 1926 the Bank of America and William Schall & Company held capital stock of the Klots Throwing Company, which they had received in lieu of the company's indebtedness to them, as follows:
| Shares "A" stock | Shares "B" stock | Total | |
| Bank of America | 925 | 1,331 | 2,256 |
| William Schall & Company | 991 | 2,400 | 3,391 |
For the purpose of improving the credit position of the Klots Throwing Company and to reestablish banking confidence in it, the petitioners offered to purchase and did purchase from the above named concerns the capital stock which they had taken in lieu of the company's indebtedness to them, plus interest thereon. In order to effect the immediate desired improvement, without waiting until such time as the Klots Throwing Company paid dividends to the Bank of America and William Schall & Company, in such amounts as would reduce the indebtedness, plus interest, to an amount substantially equivalent to the market value of the stock, the petitioners agreed to pay for the stock a price which would include the*1223 difference between the market value of the stock and the indebtedness of the company in exchange for which the creditors had accepted the stock. At the time this transaction took place, the Klots Throwing Company contemplated paying back dividends. The price which the petitioners paid for the stock was far in excess of its fair market *1241 value and was in full recognition by them of the fact that back dividends would shortly be paid. The contemplated dividends were paid the petitioners during the year 1926.
The petitioners do not contend that the dividends received by them from the Klots Throwing Company were other than earnings or profits accumulated subsequent to February 28, 1913, or that because of the method of accounting employed by them, the income represented by the dividends should be accounted for as of a taxable period other than the year 1926, when received by them. The petitioners' returns for the year 1926 were filed on the basis of cash receipts and disbursements. The record does not disclose that the petitioners kept books on a different basis.
OPINION.
SEAWELL: The record shows the petitioners purchased certain shares of corporate stock shortly*1224 prior to the declaration of a dividend, which dividend they expected to be declared and which influenced them in the price which they paid for the stock, and that the Commissioner included in the taxable income of the petitioners for the year 1926 the full amount of the dividends received by them during that year. Did the Commissioner err in his action as indicated, is the question for our determination.
In the circumstances of the case as detailed in our findings of fact, the petitioners insist that the dividend or dividends declared and received by them in 1926 should not be treated as income, but as merely a return of capital, because they had paid far in excess of the market price of the stock at the time the purchase was made.
The question, however, is purely one of law and has heretofore been decided by us and, as we think, properly, against the contention of the petitioners and there is therefore no necessity for a further discussion of the subject. In , a similar question was presented for our determination and we there (p. 368) stated:
Undoubtedly the price paid for the stock was based upon the known or anticipated amount*1225 of earnings available or soon to be available for the payment of dividends, but this by no means establishes the contention of the petitioner. On this issue the determination of the respondent is affirmed. .
The only case cited by the petitioners in support of their contention is , which is so obviously distinguishable from the instant case, both on the issues and the facts involved, that a discussion thereof is unnecessary.
Judgment will be entered for the respondent.