1931 BTA LEXIS 1978">*1978 A corporation which, in order to reflect on its books ascertained appreciation in value of its assets, issues bonds to its stockholders in proportion to their stockholdings, and subsequently purchases part of the bonds for less than their face value, realizes no taxable gain.
22 B.T.A. 1277">*1277 Respondent has asserted against petitioner deficiencies of $8,774.33 and $3,010.31 in income taxes for the fiscal years ended September 30, 1926 and 1927, respectively. In determining said deficiencies he added $46,893.48 to taxable income for 1926, and $3,744 for 1927, said sums representing the difference between the par value of certain of petitioner's bonds and the lesser amounts for which they were purchased by it and canceled. Petitioner contends that said amounts should be excluded from taxable income.
FINDINGS OF FACT.
Petitioner is a New York corporation, with principal place of business at 165 Broadway, New York City. On April 4, 1914, its board of directors considered and approved an appraisal showing its assets to have a value of $3,000,000 in excess1931 BTA LEXIS 1978">*1979 of its capital stock, and judging it desirable that this excess value should be reflected on the books and represented by additional stock or bonds, duly resolved "that Two Million Dollars in Five Per Cent Serial Gold Bonds, of which Fifty Thousand Dollars of the principal thereof shall be 22 B.T.A. 1277">*1278 paid annually and the balance of the principal be paid on July 1, 1934, be issued to the stockholders * * * in proportion to their stockholdings," and further resolved that additional preferred stock be issued, of which one million dollars, representing the increased value of the assets, should likewise be distributed to stockholders in proportion to their stockholdings.
At a stockholders' meeting held April 21, 1914, the action of the board of directors was considered and approved, and 5 per cent debenture bonds in the amount of $2,000,000, representing the value of assets, were duly issued and distributed to the stockholders in accordance with their stockholdings, and the provision that $50,000 thereof should be retired annually was duly carried out.
Pursuant to resolutions of the board of directors on October 26, 1925, and June 22, 1926, the sums of $500,000 and $350,000, respectively, 1931 BTA LEXIS 1978">*1980 were appropriated for the purchase and cancellation of a part of the 5 per cent debenture bonds still outstanding. During the fiscal years ended September 30, 1926 and 1927, petitioner purchased lots of said bonds having a par value of $810,000 and $78,000 for $763,106.52 and $74,256, respectively. The bonds were thereupon canceled and destroyed, and the unexpended balance of the money appropriated was ordered returned to the treasury by the board of directors.
In computing petitioner's income tax liability, the Commissioner included $46,893.48 in gross income for the fiscal year ended September 30, 1926, and $3,744 for the fiscal year ended September 30, 1927, said sums representing excess of the par value of the bonds bought and canceled in said years over the purchase price paid for them.
OPINION.
STERNHAGEN: The taxpayer, in 1914, declared a bond dividend whereby it promised to pay to its shareholders an amount equal to part of the ascertained increment in value of its property over its capital stock. It had not realized this increment by sale or disposition of its property, the increment having been disclosed by an appraisal. Thus it created a bonded debt not for1931 BTA LEXIS 1978">*1981 a received consideration, but by way of a dividend, and the dividend was of course not a tax deduction or any other factor of the corporation's income, although it may have been income to the recipient shareholder, . In its fiscal years 1926 and 1927, the corporation bought some of these bonds for less than the face amount of their obligations - that is, it paid less to discharge its dividend debt than it had promised to pay when it declared the dividend, and was thus discharged of the obligations. In our opinion, there has been no gain to be included in income from this 22 B.T.A. 1277">*1279 transaction. We reach this conclusion not merely because the case is somewhat like numerous others already decided, but because an analysis of its own facts discloses less ground for a determination of income than some of those heretofore considered. ; (now on review); (now on review); 1931 BTA LEXIS 1978">*1982 .
Whatever might be said of cases where the debtor corporation has actually received cash or property and later pays less than it had promised and accounted for, it does not apply to a case like this, where it received nothing, but merely raised its book value, declared a dividend, and paid less than its amount. Even the converse of the , would require a distribution of the enhanced property itself as the realization of gain. It is not enough to speak only of buying and retiring bonds for less than par; the question is whether there has been gain under all the circumstances, and this requires consideration of all that has been received or accrued on the one hand and given up on the other. If and when this petitioner sells or otherwise disposes of its property and thus brings to realization the increment in its value, the question of gain will arise. Meanwhile it can not be said to have realized the gain by the course so far taken.
Judgment will be entered under Rule 50.