*2752 In 1922 the Manufacturers National Bank and the Citizens National Bank were merged by the contribution by each of an equal amount of assets. The petitioners received stock in the new institution by exchanging share for share. The excess assets of the Manufacturers National Bank were conveyed to certain trustees who in turn distributed a part of such assets to the stockholders of the Manufacturers National Bank. Held, that the transfer to the trustees constituted a declaration of a dividend which became income to the stockholders when paid to them by the trustees.
*1018 In these proceedings, which have been consolidated, the petitioners seek a redetermination of their income-tax liabilities, in the case *1019 of William E. Fulton for the years 1922, 1923, and 1925, for which years the respondent has determined deficiencies of $6,689.11, $901.67, and $220.32, respectively, and in the case of William Shirley Fulton, for the years 1922 and 1923, for which years the respondent has determined deficiencies of $1,913.54 and $364.84, respectively.
*2753 The one issue presented is whether distributions received by petitioners as stockholders of the Manufacturers National Bank upon their respective holdings of stock as of November 11, 1922, are ordinary dividends subject to tax.
FINDINGS OF FACT.
The petitioners had for many years prior to 1922 been stockholders in the Manufacturers National Bank of Waterbury, Conn.
Early in 1921 the directors of this bank and those of the Citizens National Bank of the same place entered into an agreement for the purpose of merging the two banks. At this time the Manufacturers National Bank had a capital of $200,000, and the Citizens National Bank a capital of $300,000. It was proposed that the stockholders of the Manufacturers National Bank increase their capital stock to $300,000 and that the two banks be merged under the charter of the Manufacturers National Bank with a total capital and surplus of $1,000,000. In anticipation of this merger each stockholder of the Manufacturers National Bank on March 28, 1921, subscribed and paid for at par, $100, an additional share of stock for each two shares held by him. Further negotiations were entered into by the two banks and a proposed plan*2754 of merger was submitted to the Comptroller of the Currency for the merging of the institutions. However, this merger was never consummated but was rescinded.
On August 28, 1922, a second agreement of merger was entered into by the two banks, which was ratified and approved by the respective stockholders of the banks on the 1st day of September, 1922, and subsequently approved by the Comptroller of the Currency. The two banks were merged on November 11, 1922, using the charter of the Manufacturers National Bank with the name changed to the Citizens & Manufacturers National Bank.
The capital stock at the time of the consolidation was $600,000, represented by 6,000 shares of a par value of $100 each, and the surplus, $200,000, making a total capital and surplus of $800,000. This capital and surplus was created by the contribution on the part of the two merging banks of assets in the amount of $400,000 each. The capital stock was allotted equally to the stockholders of the two consolidating banks by an exchange of stock, share for share. The remaining assets of the merged banks, after the contribution of $400,000, were, prior to the merger, transferred to trustees for the *1020 *2755 benefit of the respective shareholders. The trust agreement provided that each group of trustees was to hold at least $125,000 of these assets for a period of two years as a fund from which to pay the merged association any loss suffered by it on the original assets transferred. Upon the expiration of the two-year period these two guaranty funds were to be adjusted and turned over to the merged bank as surplus. The remainder of the assets in the hands of the trustees was to be distributed to the stockholders of the respective banks.
On November 13, 1922, the stock of the merged bank was issued direct to the stockholders of the two merging banks, who surrendered their shares in the original institutions.
On November 15, 1922, the trustees of the Manufacturers National Bank declared and paid a dividend equal to 50 per cent of the capital stock of the Manufacturers National Bank. Subsequently, further distributions of the same character were made from the assets in the hadns of the trustees as follows: 10 per cent in 1923, 4 per cent in 1925, 2 per cent in 1926.
On February 26, 1926, the trustees of the Manufacturers National Bank and the Citizens National Bank each turned*2756 in to the surplus account of the merged bank, $121,222.93, which represented the adjusted amounts in the $125,000 guaranty fund.
On March 1, 1913, the petitioner, William E. Fulton, was the owner of 200 shares of capital stock of the Manufacturers National Bank, which had cost him $27,185. On the same date, William Shirley Fulton was the owner of 70 shares of capital stock of this bank, which had cost him $12,360. The fair market value of the Manufacturers National Bank stock on March 1, 1913, was $185 per share.
On August 11, 1919, the petitioner, William E. Fulton, acquired from his wife by gift 50 shares of the capital stock of the Manufacturers National Bank, which had a fair market value on that date of $180 per share. On March 30, 1921, the petitioners subscribed and paid for additional stock of the Manufacturers National Bank at par, William E. Fulton receiving 125 shares and William Shirley Fulton, 35 shares. On May 25, 1921, the petitioner, William E. Fulton, gave to Lewis S. Reed 10 shares of the stock of the Manufacturers National Bank, and on December 24, 1921, 5 additional shares. At the time of each of these gifts, the fair market value of the stock was $200*2757 per share.
On November 11, 1922, William E. Fulton received from the Citizens & Manufacturers National Bank, under the merger agreement, 360 shares of its capital stock, and William Shirley Fulton received 105 shares. The fair market value of this new stock on this date was $160 per share.
*1021 On November 15, 1922, William E. Fulton received $180,000 and William Shirley Fulton, $5,250, representing the 50 per cent dividend paid by the trustees of the Manufacturers National Bank. In 1923 William E. Fulton received $3,600 and William Shirley Fulton $1,050 from these trustees as the 10 per cent dividend, and in 1925 William E. Fulton received $1,440 from said trustees, representing the 4 per cent dividend.
On November 11, 1922, the undistributed earnings and profits of the Manufacturers National Bank since February 28, 1913, exceeded the total distribution of the years 1922, 1923, 1925, and 1926.
OPINION.
GREEN: The respondent has based his deficiencies on the theory that the distribution to the stockholders of the Manufacturers National Bank by the trustees is taxable as a dividend. The petitioners contend that the monies paid to them by the trustees, acting*2758 for and on behalf of the Manufacturers National Bank, constituted part of the consideration for the exchange of their stock in that bank for stock in the Citizens & Manufacturers National Bank, and, that under section 202(e) of the Revenue Act of 1921, no income resulted from this transaction, because the amount of such monies did not exceed the basis prescribed by the statute to be used in the computation of gain or loss resulting from the sale or other disposition of the stock.
The effect the merger of the two banks, a plan was devised whereby each bank should contribute the same amount of assets to the merged bank and then exchange stock in the old banks, share for share, for stock in the merged institution. The transfer of the necessary assets would leave the merged banks with assets in their possession. These additional assets, before the transfer to the Citizens & Manufacturers National Bank, were transferred to trustees for the benefit of the respective stockholders.
The facts in the instant case are analogous to those in *2759 , in which an agreement was made between the active and inactive stockholders of a corporation to the effect that the inactive stockholders should transfer their common stock in the corporation to the persons actively engaged in the management of the business. This agreement was carried into effect under an arrangement providing for the exchange of the common stock for preferred stock in an amount equal to the book value of the common stock, after excluding from the assets of the corporation certain securities owned by it and all accounts theretofore charged off the books. It was also agreed that the securities mentioned should be divided among the inactive stockholders and that the accounts should be turned over to a trustee to be collected by him for the *1022 benefit of the new common stockholders. In that case we held that the transfer of the unpaid accounts of the corporation to a trustee, to collect and pay the same to certain stockholders, constituted a declaration of a dividend, which became income to the stockholders when paid to them by the trustee.
In our opinion the distributions under consideration should*2760 be treated as dividends in the years in which they were paid.
Reviewed by the Board.
Judgment will be entered for the respondent.
PHILLIPS, dissenting: The question here is whether the money received by the petitioners is taxable as a dividend under section 201 of the Revenue Act of 1921 or falls within the provisions of sections 202(c)(2) and 202(e). The Supreme Court had much the same question before it in Hellmich v. Hellman,485 Sup.Ct. 244; 276 U.S. 233">276 U.S. 233, where it reached the conclusion that the payments there in question were not dividends. The payments here in question were received by the petitioners pursuant to the express terms of the reorganization agreement and not pursuant to any declaration of a dividend by the corporation. I am of the opinion that if we follow the reasoning of the court in the case cited, we must reach the conclusion that the payments in question are not dividends. Rather, they fall within that part of section 202(e) which reads:
When property is exchanged for property specified in paragraphs * * * (2) * * * of subdivision (c) as received in exchange, together with money * * *, the*2761 money * * * shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of that basis, shall be taxable to the extent of the excess.
I can not agree with the conclusion reached in the prevailing opinion.
MURDOCK agrees with this dissent.