*1482 In 1926 petitioner declared in partial liquidation of its capital stock a dividend of $80 per share "payable in cash and in land contracts receivable." For a number of years it had made returns on the installment basis. Held, that it derived no taxable income from the distribution to its stockholders of the installment notes in question. Virginia Beach Golf Course Annex Corporation,23 B.T.A. 1169, followed.
*689 This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1926 in the amount of $34,645.27, the entire amount of which is in controversy.
The only issue is whether the respondent erred in treating as taxable income in 1926 the unrealized portion of profits on installment sales contracts made by petitioner in prior years, which contracts were distributed to its stockholders during the taxable year in partial liquidation of its capital stock. The facts were stipulated.
FINDINGS OF FACT.
The petitioner was organized on or about October 22, 1915, under*1483 the laws of the State of Michigan with an authorized capital stock of 5,000 shares of common, par value $100 per share. Its principal office is in the city of Detroit.
At the time of its incorporation it acquired certain land known as the Smart Farm. Subsequent to such acquisition the farm was subdivided into lots, substantially all of which were sold on the installment basis. Petitioner's sole business has been the selling of lots on the installment plan. Petitioner has consistently filed all of its income-tax returns on the installment basis, and such returns have been accepted by the Government and its tax liability determined on that basis.
The petitioner's balance sheet as of the beginning of its taxable year, namely, as of January 1, 1926, was as follows:
| Assets | |
| Cash | $9,357.32 |
| Unsold Lots | 8,277.67 |
| Land Contracts Receivable | 575,059.98 |
| Mortgages Receivable | 13,329.28 |
| Bonds | 9,700.00 |
| Operating Deficit | 301,267.44 |
| Total | 916,991.69 |
| Liabilities | |
| Mortgages Payable | $5,595.00 |
| Reserve for Improvements | 31,531.41 |
| Commissions Payable | 43,329.90 |
| Unrealized Profits on Installment Sales | 336,535.38 |
| Common Stock | 500,000.00 |
| Total | 916,991.69 |
*1484 *690 At a special meeting of the stockholders of petitioner, held on January 2, 1926, the following resolution was adopted:
Now THEREFORE BE IT RESOLVED that the Capital Stock of the Company be decreased from Five Hundred Thousand ($500,000) Dollars to One Hundred Seventy-Five Thousand ($175,000) Dollars, * * *
AND BE IT FURTHER RESOLVED that the Directors be and they hereby are authorized to distribute cash and assets of the Company to the stockholders of the Company in proportion to their respective stockholdings therein in such amount and in such manner as they may determine and in partial liquidation of the Capital Stock of the Company.
At a special meeting of the directors of petitioner held on January 2, 1926, a resolution was adopted to carry out the resolution of the stockholders adopted on the same day to decrease petitioner's outstanding capital stock from $500,000 to $175,000 and to distribute cash and assets of petitioner in partial liquidation of its capital stock. The material part of the resolution adopted by petitioner's directors is as follows:
BE IT FURTHER RESOLVED that stock certificates in such form as above described be prepared and issued to*1485 the stockholders of the company in proportion to their present holdings upon surrender by the stockholders of their present certificates, and that such present outstanding certificates when so surrendered shall be cancelled, and that stockholders be notified to surrender their certificates forthwith for the purpose of effecting such exchange;
That a dividend in the amount of Eighty ($80.00) Dollars per share be and the same hereby is declared in partial liquidation of the capital stock of the company payable January 2nd, 1926, to the stockholders of record that same day, payable in cash and in land contracts receivable taken at the book value thereof.
In 1926, acting in accordance with the resolutions of the stockholders and directors of January 2, 1926, a distribution in partial liquidation was made by petitioner to its stockholders in proportion to their stockholdings, in the following amounts:
| Cash | $2,729.23 |
| Land contracts, book value | 397,270.77 |
| Total | 400,000.00 |
The above dividend of $400,000 was paid out of capital.
There were included in the above $397,270.77 distribution of land contracts, "unrealized profits" in the amount of $254,631.62. These*1486 unrealized profits would ultimately have been realized if the land contracts had been collected in full by petitioner.
Petitioner made its income-tax returns for 1926, and for prior years, upon the installment basis, as is provided for in sections 212 (d) and 1208 of the Revenue Act of 1926.
In such returns it reported the profit included in the cash collections in the year of receipt. For the taxable year in question it did not return as income any profit upon the installment notes distributed *691 to the stockholders in the amount of $397,270.77, the fair market value of which was $397,270.77.
The petitioner on its income-tax return for the calendar year 1926 reported a net income of $3,888.91. The respondent has increased the net income so reported by $254,631.62 (which is the unrealized profit in the land contracts of the book value of $397,270.77 distributed to the stockholders as aforesaid), on the ground that such unrealized profit became realized at the time the distribution was made to the stockholders. The entire deficiency arises from the inclusion of the said $254,631.62 in petitioner's net income.
In accordance with the resolutions of the stockholders*1487 and director's on January 2, 1926, petitioner's capital stock was reduced from $500,000 to $175,000.
OPINION.
LOVE: Petitioner contends that the question involved in this proceeding is controlled by our decision in . We agree with that contention.
The respondent contends that the facts in the instant proceeding differ from those in the case relied upon by petitioner in that the dividend in the Virginia Beach case was stipulated to have been an unliquidated dividend in kind, whereas the dividend in the instant proceeding was for a definite amount, namely, $80 per share; that by the declaration of such dividend the petitioner created an indebtedness of $400,000 in favor of its stockholders; and that when it liquidated such indebtedness with $2,729.23 of cash and $397,270.77 of land contracts, it realized the profit of $254,631.62 contained in such contracts, on the ground that what it did was just the same as if it had sold the land contracts for $397,270.77 and taken the proceeds therefrom to pay its indebtedness to its stockholders.
We think the dividend in the instant proceeding is as*1488 much a dividend in kind as was the dividend in the Virginia Beach case, Supra. The resolution of the stock holders specifically authorized the directors "to distribute cash and assets of the Company to the stockholders" and in accordance with such resolution the directors resolved "That a dividend in the amount of Eighty ($80.00) Dollars per share be and the same hereby is declared in partial liquidation of the capital stock * * * payable in cash and in land contracts receivable taken at the book value thereof." At that time petitioner had only $9,357.32 of cash in its treasury, whereas it had land contracts on its books in the amount of $575,059.98. We think this fact, together with the action taken by the stockholders and directors, clearly shows that the dividend to the extent of $397,270.77 was one *692 in kind, namely, "in land contracts receivable taken at the book value thereof."
It follows that our decision here must be the same as it was in , and that the respondent erred in including the amount of $254,631.62 in petitioner's net income. See particularly point 1 of our opinion in the *1489 Virginia Beach case, at page 1172.
Reviewed by the board.
Judgment will be entered for the petitioner.