1929 BTA LEXIS 2241">*2241 Where the evidence shows that a going corporation owning stock in another corporation, which stock represents in part earnings and surplus accumulated since February 28, 1913, does not sell such stock, but distributes the same in kind to its stockholders, no deductible loss is sustained, although the market value of such stock at date of distribution is less than it cost the owning corporation.
17 B.T.A. 804">*804 The Commissioner disallowed a claimed loss of $72,304.34 in 1922, alleged by petitioner to have been sustained by it in the disposition of 9,526 shares of the capital stock of the Amalgamated Sugar Co. Such disallowance resulted in deficiencies of $542.33 and $6,155.79, for the years 1922 and 1923, respectively.
The petitioner claims that the amount of $72,304.34 should have been allowed as a deduction and that in computing its taxable net income for 1923, a deduction of net loss claimed to have been sustained in 1922, should have been allowed.
The facts are stipulated.
FINDINGS OF FACT.
Prior to September 30, 1922, petitioner1929 BTA LEXIS 2241">*2242 was a Utah corporation, engaged solely in the business of a savings bank, named Ogden Savings Bank. It amended its charter and changed its name to the first and Utah Savings Bank, effective September 30, 1922. During 1923 petitioner again amended its charter, among other things changing its name to the First Utah Savings Bank. Subsequently, it again amended its charter, changing its name to First Savings Bank of Ogden, its present name.
By amendment of petitioner's charter adopted August 28, 1922, an increase in capital stock from $150,000 to $250,000 was authorized.
On or about September 30, 1922, petitioner declared a stock dividend of 10 &er cent, increasing the stock outstanding from $150,000 to $165,000. About the same date it delivered to O. W. Adams and S. T. Jeppesen, as trustees, 9,526 shares of common stock of Amalgamated Sugar Co., which stock had been acquired at various times after 1913, at a total cost of $108,501.14. The delivery to the trustees of certain assets of petitioner was authorized by resolution of the board of directors of the petitioner, passed September 30, 1922, reading as follows:
17 B.T.A. 804">*805 RESOLVED that the president, or the vice-president, 1929 BTA LEXIS 2241">*2243 and the cashier of this corporation, the Ogden Savings Bank, be and they are hereby authorized and directed to transfer and deliver to O. W. Adams and S. T. Jeppesen, as trustees, such assets of this corporation as will result in the capital, surplus and undivided profits hereof being reduced to Two Hundred Seventy-three Thousand Nine Hundred and no/100 ($273,900.00) Dollars, such transfer and delivery to be made upon the terms and under the conditions set out in the following form of trust agreement.
FURTHER RESOLVED that they be and they are hereby authorized and directed to execute, with said trustees, on behalf of and in the name of this corporation, the said trust agreement * * *.
The trust agreement between the Ogden Savings Bank and the said Adams and Jeppesen, as trustees, among other things provided:
The First National Bank of Ogden and The Utah National Bank of Ogden have entered into an agreement of consolidation which lacks only the approval of the Comptroller of the Currency to make it effective. Prior to the effective date of the consolidation it is intended that the said The Utah National Bank of Ogden shall transfer to the party of the first part, hereinafter1929 BTA LEXIS 2241">*2244 called the Savings Bank, all of its savings accounts and that the Savings Bank shall sell eight hundred fifty (850) shares of its capital stock to the shareholders of The Utah National Bank at a price agreed upon. It is also intended that a sufficient amount of the assets of the Savings Bank shall be transferred to the Trustees in trust for the use and benefit of its stockholders, as of the 30th day of September, 1922, and prior to the sale of any of its newly authorized capital stock, as will result in said shareholders, and those who shall purchase the said Eight Hundred Fifty (850) shares, being placed on the same basis with respect to the assets of the Savings Bank.
NOW, THEREFORE, the party of the first part, in consideration of thhe sum of One and no/100 ($1.00) Dollar to it in hand paid by the said Trustee, the receipt whereof is hereby acknowledged, and for the purpose of accomplishing the objects hereinafter set forth, does hereby grant, bargain, sell, convey, assign, transfer and set over unto the said parties of the second part [the said trustees], their successors and assigns in trust all and singular the property described in the schedule hereto annexed [being the1929 BTA LEXIS 2241">*2245 9,526 shares Amalgamated Sugar Company stock] * * *.
The trustees, their successors and assigns, were directed in said trust agreement to proceed to convert all of the assets conveyed to them into cash as soon as able to do so and were, immediately after the execution of the trust agreement, to:
* * * Execute and deliver to each of the stockholders of the Savings Bank, as shown by its books on the 30th day of September, 1922, and prior to the issue of any part of its capital stock recently authorized by amendment to its Charter, a trust certificate covering and designating the proportion of said trust fund to which said shareholder is entitled, which certificate shall be transferable only on the books of the Trustees on the surrender thereof duly endorsed, and shall entitle its owner, as shown by the books of the Trustees, to participate in the proportion therein stated in all distributions of said trust fund. * * *
17 B.T.A. 804">*806 The trust agreement further provided:
The Trustees shall have the power to sell and dispose of any, or all of the property, real or personal, held by them in trust hereunder, at private or public sale, at such times and upon such terms as to them1929 BTA LEXIS 2241">*2246 shall seem meet, and upon any such sale thereof to execute, acknowledge and deliver all necessary and proper deeds, or instruments of conveyance, for the vesting of title thereof in the purchaser or purchasers; and no purchaser, at any such sale, shall be bound to see to the proper application of the purchase money in the hands of the Trustees. The Trustees, in the performance of their duty to reduce the said trust fund to cash, may institute such legal proceedings, or take such other steps as they may consider necessary or expedient, and they shall be indemnified out of the said property against loss, expenses, and liability that may be incurred by them in so doing.
As soon as it conveniently may be done after the said fund has been converted into cash, the Trustees shall distribute the whole thereof then remaining in their hands, after deducting necessary expenses and disbursements as hereinafter provided, among the said owners of trust certificates in proportion to their respective interests, and shall thereupon render an accounting of their administration of the said trust to the Board of Directors of the Savings Bank. * * *
In the event of the death, disability or resignation1929 BTA LEXIS 2241">*2247 of either trustee, the Board of Directors of the Savings Bank may appoint his successor. During a vacancy resulting from the death, disability or resignation of either trustee, or from any other cause, the remaining Trustee shall have full power and authority to administer the trust until a successor to the other is appointed.
No person shall be eligible to the office of Trustee, who is not an officer or employee of the Savings Bank.
The Board of Directors of the Savings Bank may remove any Trustee at will.
It is contemplated that said fund will be administered at the banking house of the Savings Bank and that the Trustees and bank employees shall administer it. It is further contemplated that the said Trustees and such bank employees as they shall engage to administer the fund shall receive no compensation for their services, except their salaries from the said bank. The Trustees therefore agree that they shall not be entitled to any compensation whatever for their services performed in the administration of the said trust. All other expenses of the said trust fund, all income taxes which may hereafter become due and payable on income of the Savings Bank up to and including1929 BTA LEXIS 2241">*2248 September 30th, 1922, and all unknown debts and liabilities of the Savings Bank existing September 30th, 1922, shall be paid when due out of the fund.
Before entering upon the duties of the said trust, each of the said Trustees shall take an oath to administer the said trust with fidelity, and shall give bond for the faithful performance of his duties to the Savings Bank, for the use and benefit of the beneficiaries under the trust, in such amount as shall be determined by the Executive Committee of said bank.
* * *
No liability of any kind, character, or description shall attach to the Trustees, or either of them, or shall exist, or arise or inure on account of any act of the Trustees, or either of them, performed pursuant to the provisions hereof, whether by reason of acts of omission, or commission, of the Trustees, or either of them, or by reason of any liability statutory or otherwise which might hereafter exist or arise in favor of any persons dealing with any matter in connection with, or covered by the said trust.
17 B.T.A. 804">*807 The only responsibility or liability, which the Trustees, or either of them, shall assume by reason hereof, is for actual fraud or bad faith, 1929 BTA LEXIS 2241">*2249 and neither Trustee shall be liable for any fraud or had faith of the other, or of any other person whomsoever, nor for any error of judgment, mistake, or neglect, nor for the acts or defaults of any other person, or for the acts or defaults of any agent, servant, or employee of the Trustees, or either of them. The Trustees by accepting said trust and acting as such Trustees, assume no obligation or liability to any beneficiary under the said trust, or any other person other than to endeavor to carry this agreement into effect in good faith.
Should any suit, or proceeding, be brought against the Trustees, or either of them, by reason of any matter, or thing connected with the trust hereby created, or by reason of being such Trustee, or Trustees, he or they shall be entitled to be reimbursed for all proper outlays of every sort and nature made by him, or them, in connection with such suit or proceeding, and all such outlays shall constitute and continue a lien upon the trust property prior to any other lien thereon.
The terms, "Trustee" and "Trustees", as employed in this instrument, shall be taken to mean the Trustee or Trustees hereunder for the time being, whether the parties1929 BTA LEXIS 2241">*2250 of the second part, or either of them, or their, or either of their, successors in the said trust.
The title to the trust property shall vest in the successor or successors of the said Trustees and no conveyance thereof to such successor or successors shall be necessary.
The said Trustees hereby accept the said trust in this instrument declared and provided, and in consideration of the sum of One Dollar ($1.00) to them in hand paid by the party of the first part, the receipt whereof is hereby acknowledged, agree to perform the same upon the terms and conditions hereinbefore set forth.
On October 17, 1922, the board of directors of the First and Utah Savings Bank, formerly Ogden Savings Bank, passed the following resolution:
RESOLVED that O. W. Adams and S. T. Jeppesen, as trustees, be and they are hereby authorized and directed to deliver as a dividend Nine Thousand (9000) shares of the Amalgamated Sugar Company common stock to the stock holders of the Ogden Savings Bank, as of record September 30, 1922, prorated on the basis of Sixteen Hundred Fifty (1650) shares. Such transfer and delivery to be made upon the premise and under the conditions set out in the trust agreement.
1929 BTA LEXIS 2241">*2251 November 11, 1922, in accordance with said authorization, the said trustees transferred and delivered to the stockholders of petitioner, pro rata, 9,000 shares of stock of the Amalgamated Sugar Co.
The earned surplus and undivided profits of the petitioner September 30, 1922, were greater than the book value or cost of the assets transferred to the trustees.
On September 30, 1922, prior to the transfer of said assets in said trust agreement, the books of the petitioner showed outstanding capital stock of $150,000, surplus of $150,000 and profit and loss credit of $2,574.46, as evidenced by a true copy of the balance sheet of petitioner.
17 B.T.A. 804">*808 On September 30, 1922, the petitioner charged off on its surplus account, on account of said transfer of said 9,526 shares of Amalgamated Sugar Co. stock, an alleged loss of $72,304.34, entering the cost of said 9,526 shares at $108,501.14 and the market value at $36,196.80.
The said 9,526 shares of common stock of the Amalgamated Sugar Co. were acquired by petitioner at an aggregate cost of $108,501.14 and had a fair market value as at September 30, 1922, or at the time of distribution to stockholders of petitioner in 19221929 BTA LEXIS 2241">*2252 of $36,196.80, or $3.79 per share.
OPINION.
LITTLETON: The transaction here in question occurred in 1922 and is governed by the provisions of the Revenue Act of 1921, the parts of which pertinent here, are as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise * * *.
SEC. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922.
SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the1929 BTA LEXIS 2241">*2253 cost of such property * * *.
It appears from the stipulation of facts that there was, in August, 1922, an amendment of petitioner's charter, authorizing an increase in its capital stock from $150,000 to $250,000, and that in the following month petitioner declared a stock dividend of 10 per cent, increasing the capital stock outstanding from $150,000 to $165,000. Relative to this stock dividend there is no dispute.
It further appears that the petitioner authorized the sale of stock of the par value of $85,000, as yet unissued, at a price based on adjusted value of assets after transfer of assets to trustees, as set forth in the findings of fact.
On September 30, 1922, a resolution was adopted by petitioner's board of directors authorizing and directing the transfer and delivery to two trustees, of certain assets of petitioner to be by them converted into cash and the proceeds distributed pro rata among the stockholders, according to their holdings of stock, first deducting 17 B.T.A. 804">*809 necessary expenses and disbursements, as provided in the trust agreement.
The trust agreement was never executed according to its terms and conditions. Among other things, it provided:
1929 BTA LEXIS 2241">*2254 It is contemplated that said fund will be administered at the banking house of the Savings Bank and that the Trustees and bank employees shall administer it. It is further contemplated that the said Trustees and such bank employees as they shall engage to administer the fund shall receive no compensation for their services, except their salaries from the said bank. The Trustees therefore agree that they shall not be entitled to any compensation whatever for their services performed in the administration of the said trust. All other expenses of the said trust fund, all income taxes which may hereafter become due and payable on income of the Savings Bank up to and including September 30th, 1922, and all unknown debts and liabilities of the Savings Bank existing September 30th, 1922, shall be paid when due out of the fund.
What were the "unknown debts and liabilities of the Savings Bank existing September 30, 1922," which were to be paid "when due out of the fund" to be realized from a conversion of the assets delivered to the said trustees is not in evidence before us.
There is no evidence that the directors of the Savings Bank or its stockholders ever insisted on or desired1929 BTA LEXIS 2241">*2255 the execution of the alleged trust agreement according to its terms. The two individuals named as trustees apparently did nothing towards execution of the trust prior to October 17, 1922.
On that date a resolution was passed by the directors of the Savings Bank authorizing and directing the trustees "to deliver as a dividend Nine Thousand (9000) shares of the Amalgamated Sugar Company common stock to the stockholders of the Ogden Savings Bank, as of record September 30, 1922, prorated on the basis of Sixteen Hundred Fifty (1650) shares. Such transfer and delivery to be made upon the premises and under the conditions set out in the trust agreement."
Such transfer and delivery were made to the stockholders on November 11, 1922. No disposition whatever was made of 526 shares of the 9,526 shares originally authorized and directed in the so-called trust agreement to be converted into cash for distribution to stockholders, after paying "necessary expenses and disbursements" and "all unknown debts and liabilities of the Savings Bank existing September tember 30, 1922."
Considering the so-called trust agreement in the light of the interpretation apparently put upon it by the directors1929 BTA LEXIS 2241">*2256 of the Savings Bank and the trustees themselves, and what was actually done, it appears to have been nothing more than an agency arrangement for such disposition of the 9,526 shares of stock as the directors of the Savings Bank might direct. What the directors subsequently ordered done, by resolution of October 17, 1922, is what 17 B.T.A. 804">*810 was actually done and it is that with which we are now concerned. See .
At the time, September 30, 1922, the trust agreement was signed, the petitioner charged off on its surplus account an alleged loss of $72,304.34, entering the cost of the 9,526 shares of Amalgamated Sugar Co. stock at $108,501.14 and the market value at $36,196.80. The cost is stipulated to be as indicated and the market value on that date to have been as stated, but petitioner was not warranted in charging off as a loss the difference between the two amounts.
There was not on September 30, 1922, nor on October 17, 1922, nor on any other date indicated by the evidence, any resolution of the board of directors or any entry on the minutes or any record of any kind, declaring a dividend of so much of a percentage of the earnings1929 BTA LEXIS 2241">*2257 or surplus of the company, or any dividend based on the capital stock or any dividend in dollars and cents.
There was no execution of the trust agreement as contemplated by its terms or as indicated by the resolution of the board of directors of September 30, 1922.
What was done was by virtue of the resolution of October 17, 1922, and in accordance with its directions, which was a distribution in kind of 9,000 shares of Amalgamated Sugar Co. stock pro rata among petitioner's stockholders. It is true, such distribution was termed a "dividend," not a "stock dividend" in the sense that such phrase is generally used, but a dividend in property or a distribution in kind.
The question to be decided, therefore, is whether a corporation sustains a loss upon the payment of a dividend in property which cost it more than its market value at the time of distribution to the stockholders.
The instant case is not like the case of , where a specific sum of money was declared as a dividend and paid to the stockholders in part by delivery to them of Liberty bonds which cost the company the same amount as the dividend declared, 1929 BTA LEXIS 2241">*2258 but at the time of delivery to stockholders had a fair market value of less than the dividend declared, the difference between the market value of the bonds and the amount of the dividend declared being paid by the company in cash.
In that case we held that the company sustained a deductible loss in the amount of said difference. The situation here is different. The value of the 9,000 shares of stock when the same were directed to be distributed as a dividend is not shown. The shares were not sold nor disposed of by exchange for other property.
If the petitioner, instead of directing the trustees "to deliver as a dividend 9,000 shares of Amalgamated Sugar Company common 17 B.T.A. 804">*811 stock to the stockholders," as was done by reason of the resolution of October 17, 1922, had declared a dividend of $102,510 (assuming earnings and surplus sufficient), and had paid the same by delivering to its stockholders the 9,000 shares of stock which cost $102,510, but worth on the market only $34,110, and the difference, $68,400, in cash, it would have sustained a loss in the amount of the difference. If, however, the stockholders had seen proper to accept as payment in full, the depreciated1929 BTA LEXIS 2241">*2259 stock at the original cost price, $102,510, the same amount as the dividend declared, no loss would have been sustained by petitioner.
The petitioner, by resolution of its board of directors, of October 17, 1922, only incurred an obligation to distribute the 9,000 shares of Amalgamated Sugar Co. stock to its stockholders, which obligation it fully discharged without loss to it, by making the distribution of the stock as directed.
The facts in this case are somewhat analogous to those in , wherein we said - referring to a dividend declared by the petitioner:
* * * If, as the resolution of February 6, 1917, indicates, the petitioner merely distributed the property interest along with other dividends, we are unable to see that loss, contingent or otherwise, resulted from the distribution. * * *
In our opinion, the transaction here under consideration is not such "sale or other disposition of property" as contemplated by the statuteSection 202(a) of the Revenue Act of 1921, whereby there may be a "gain derived or loss sustained."
There was merely a distribution in kind to stockholders, by a going corporation, of property1929 BTA LEXIS 2241">*2260 or gains and surplus accumulated since February 28, 1913, and, therefore, no loss was sustained. The Commissioner committed no error in refusing to allow the deduction.
Reviewed by the Board.
Judgment will be entered for the respondent.