*1931 Held that the Reading Co. distributed stock rights in 1924 and that under section 204(a)(9) of the Revenue Act of 1924 the basis of determining gain or loss on the sale of the stock in respect of which the distribution was made should be apportioned between such stock and the stock rights so distributed.
*61 This is a proceeding for the redetermination of a deficiency in income tax for 1924 in the amount of $10,386.41. It is alleged, first, that the Commissioner erred in deducting from the cost of certain *62 stock sold by the petitioner an amount received by the petitioner on a sale of warrants representing rights given the petitioner by the Reading Co. to purchase shares of stock in another corporation, and, second, that the Commissioner erred in not treating the receipt of the rights and their sale as income for 1923 instead of applying the value of the rights to reduce the cost of the Reading Co. stock.
FINDINGS OF FACT.
The petitioner, an individual, is a resident of New York. In 1923 he bought 2,400 shares of stock of the Reading*1932 Co. for $190,185. In 1924 the petitioner sold these 2,400 shares of Reading stock for $149,692.50. The sale price of this stock was less than the original cost thereof by $40,490.50 and the petitioner deducted this amount as a loss in determining his taxable income for 1924.
On January 10, 1924, there were distributed to the stockholders of the Reading Co., including the petitioner, warrants entitling them to subscribe for certificates of interest, later to be exchanged for stock in the Philadelphia & Reading Coal & Iron Corporation, a Delaware corporation. The petitioner received 2,400 of such warrants.
The petitioner, in anticipation of his right to receive these warrants, exchanged his right to receive them on December 31, 1923, for 550 shares of the stock of the Bradford Investment Co. The coal company rights had a market value of approximately $20 each and the 550 shares of the Bradford Co. stock received by the petitioner in exchange for his coal company rights were worth $48,464.77, representing the value attributed to the rights by the Commissioner, which value is not in dispute in this proceeding.
The distribution by the Reading Co. of the rights to acquire stock*1933 of the Philadelphia & Reading Coal & Iron Corporation was pursuant to a plan of separation of the railroad companies which had previous to that time been under a single management. This was pursuant to the final decree of the District Court of the United States for the Eastern District of Pennsylvania, entered June 28, 1923, pursuant to the mandate of the Supreme Court of the United States in the case of United Statesv. Reading Co. et al. In order to carry out the decree of the District Court so entered an agreement of merger was entered into on October 1, 1923, by the Reading Co. and its railroad subsidiaries. The purpose and effect of the decree was to separate the railroad companies from the coal companies, and in order to further carry out the decree of the court and to effectively separate the railroad companies from the coal companies a new corporation, known as the Philadelphia & Reading Coal & Iron Corporation, was organized in December, 1923, and the Reading Co., the railroad company, issued to its stockholders preferred *63 and common stock, share and share alike, the right to subscribe for certificates of interest in 1,400,000 shares of the capital stock, *1934 without nominal or par value, of the new coal company known as the Philadelphia & Reading Coal & Iron Corporation, which was formed in accordance with the final decree of the court, to which new corporation the Reading Co. sold all of its right, title and interest in the capital stock of the Philadelphia & Reading Coal & Iron Co., the old company.
The notice of the rights and the issuance of the warrants as above mentioned were sent out by the Reading Co. from Philadelphia on January 10, 1924. The warrants, however, were issued on January 2, 1924, and they were distributed on January 10, 1924, the date of the notice to the stockholders.
A meeting of the stockholders of the Reading Co. was called on August 8, 1923, to meet October 15, 1923, for the purpose of authorizing the officers and directors to take whatever action might be necessary to carry into effect the decree of the District Court entered pursuant to the mandate of the Supreme Court. Among other things coming up at that meeting was "the disposition of the stock of the Reading Iron Company and of the Philadelphia and Reading Coal and Iron Company as contemplated by said plan and final decree."
The notice to the*1935 stockholders dated January 10, 1924, of the distribution of the right to subscribe for stock in the coal company contained the following statement:
Reading Company now offers to each stockholder, registered on its books at the close of business on December 17, 1923, the right to subscribe for said Certificates of Interest at the rate of a Certificate of Interest in one share of stock of Philadelphia and Reading Coal and Iron Corporation for each two shares of stock of Reading Company, preferred or common, held by him. This right of subscription must be exercised before January 1, 1926. The price of subscription is four dollars ($4.00) for each share of stock of Philadelphia and Reading Coal and Iron Corporation represented by the Certificates of Interest subscribed for or $2 for each share of Reading stock.
There is enclosed herewith an assignable Warrant or Fractional Warrant, or both, as the case may be, evidencing the right of the stockholder named therein to subscribe for said Certificates of Interest.
As further directed by said Final Decree, Reading Company has adopted a by-law requiring an affidavit of the transferee upon every registration of transfers of Reading*1936 Company stock, preferred and common, after the date of this letter and until the further order of said District Court, such affidavit to be in substantially the form required by said Final Decree and to the effect in substance that the transferee is not the holder of any stock or the holder of a proxy to vote any stock of Philadelphia and Reading Coal and Iron Corporation or of The Philadelphia and Reading Coal and Iron Company.
On December 28, 1923, the Reading Co. executed a bill of sale to the Philadelphia & Reading Coal & Iron Corporation, conveying *64 to that corporation all of its right, title and interest in and to the shares of the capital stock of the Philadelphia & Reading Coal & Iron Co., thereby separating itself from the operation and control of the coal company in accordance with the decree of the court.
On December 28, 1923, an agreement was entered into between the Philadelphia & Reading Coal & Iron Corporation, the new coal company, and the Reading Co., including among other things a provision that the Reading Co. would issue to its stockholders warrants evidencing their right to subscribe to certificates of interest in one share of the capital stock*1937 of the new coal company for each two shares of the capital stock of the Reading Co. held by them, entitling the holders thereof upon making the payment therein provided for within the time fixed and otherwise upon compliance with the provisions thereof, to the certificate of interest in the number of shares of the new coal company stock as specified. This agreement also provided that all certificates of interest issued in exchange for warrants should be dated January 2, 1924, with certain exceptions not material here.
The committee on securities of the New York Stock Exchange, on December 13, 1923, issued the following statement:
Referring to the announcement of the Reading Company that holders of first preferred stock, second preferred stock, and common stock of record at the close of business on December 17, 1923, will receive warrants evidencing the right to subscribe prior to January 1, 1926, at $4.00 per share for certificates of interest of no par value of the proposed new Philadelphia and Reading Coal and Iron Corporation, to the amount of one-half of their holdings:
The Committee on Securities rules that the said first preferred stock, second preferred stock, and common*1938 stock be not quoted ex said rights on December 17, 1923, and not until further notice; * * *
OPINION.
TRAMMELL: The petitioner alleges that the respondent erred in reducing the cost of 2,400 shares of stock sold in 1924 by the value of 2,400 warrants to which the petitioner was entitled on distribution, which was to be made pursuant to the agreement of the corporation in December, 1923, pursuant to the decree of the District Court under a mandate of the United States Supreme Court, and also that the exchange provisions of the 1921 Act govern with respect to the exchange of the 2,400 warrants for the 550 shares of the Bradford Investment Co.'s stock.
The petitioner contends that when the instrument providing for the distribution of the stock rights was signed the petitioner had knowledge of it, knew the amount he was to receive, and that the actual issuance of warrants and the printed circular which accompanied them and their actual delivery to the petitioner were merely *65 matters of detail for the purpose of carrying out the terms of the instrument executed on December 28, 1923.
The respondent takes the position that the distribution of stock rights was made in*1939 pursuance of a plan of reorganization, that they were distributed in 1924, and that the reorganization and the gain or loss provisions of the Revenue Act of 1924 govern the transaction.
If the warrants were distributed in 1923 the Revenue Act of 1921, and not the reorganization provisions and the gain or loss provisions of the 1924 Act, would have application.
Under the petitioner's theory the distribution of the stock rights, if it occurred while the 1921 Act was in effect, would be taxable as a dividend. See , affirmed by the . But the real question here as argued by both sides is whether this is a 1924 transaction or a 1923 transaction. The Revenue Act of 1924 contains reorganization provisions and certain provisions relating to gain or loss which are materially different from those contained in the Revenue Act of 1921, and the Metcalf case would not be authority for a decision in this case if the transaction occurred in 1924. The pertinent parts of the Revenue Act of 1924 are:
SEC. 204. (a) The basis for determining the gain or loss from the sale or other*1940 disposition of property acquired after February 28, 1913 shall be the cost of such property; except that -
* * *
(9) If the property consists of stock or securities distributed after December 31, 1923, to a taxpayer in connection with a transaction described in subdivision (c) of section 203, the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed.
Subdivision (c) of section 203 is as follows:
If there is distributed, in pursuance of a plan or reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distribute from the receipt of such stock or securities shall be recognized.
Subdivision (h) of section 203 defines reorganization as follows:
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of*1941 at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form or place of organization, however effected.
*66 (2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
The distribution referred to in subdivision (c) of section 203 is an act of the corporation. The distribution made by the corporation is for the purpose of this case the essential thing. The statute does not refer to the receipt of the distribution by the distributee stockholder. We think, then, *1942 that for the purpose of subdivision (c) of section 203 the time when the distribution is made by the corporation governs. In this case, the fact that the petitioner knew in 1923 that he would receive a distribution in 1924 and, relying upon that fact, disposed of his right to receive the distribution when made, is not of so much importance. The distribution was concededly actually made by the corporation after December 31, 1923. It consisted of securities in another corporation and comes within the provisions of subsection (9) of section 204, which provides that if the property consists of stock or securities distributed after December 31, 1923, an apportionment of cost should be made between the original stock and new securities. These provisions do not make any provision for the fact that a stockholder might be aware at some time previous to the distribution that he would receive a distribution.
The distribution not having been made until January, 1924, the petitioner had nothing to sell or dispose of in 1923 except the right to receive such a distribution when made, or his expectancy of receiving it. The petitioner in any event did not have any stock rights to sell in December, *1943 1923. These did not come to him until 1924, and we think that the 1924 Revenue Act governs this transaction.
This being true, the question is, Does the transaction come within the scope of the quoted provisions of the statute? The petitioner does not contend that the reorganization provisions of the gain or loss provisions of the 1924 Act would not govern the transaction if it occurred in 1924. The respondent contends that there was a reorganization, that the stock rights distributed by the Reading Co. in another corporation were distributed pursuant to a plan of reorganization. We think that this is a correct view of the matter. The Reading Co. and its railroad subsidiaries were merged and the coal companies were reorganized and another company, known as the Philadelphia & Reading Coal & Iron Corporation, was organized. The Philadelphia & Reading Coal & Iron Corporation was formed *67 for the purpose of taking over all of the stock of the Philadelphia & Reading Coal & Iron Co., and thus became the holding company of the group of coal companies entirely separated from the railroad companies. The stock rights were issued in the new corporation, which was clearly a party*1944 to the reorganization scheme. In view of the foregoing, we think that there was distributed in pursuance of a plan of reorganization by the Reading Co., a party to the reorganization, securities in another corporation, a party to the reorganization, and that no gain or loss resulted therefrom, but that the situation comes within the scope of subdivision (9) of section 204 of the 1924 Act. Under the facts presented, under the above statutory provisions, the basis for determining gain or loss in the case of the stock in respect to which the distribution was made should be apportioned between the stock and the securities distributed, and when the petitioner sold the 2,400 shares of stock in the Reading Co., the cost of such stock should be diluted by the value of the securities received in distribution. The cost of the stock and the stock rights in the new corporation is represented by the cost of the stock in the Reading Co. No objection has been raised to the method of apportionment adopted by the respondent. We see no objection to such basis and therefore apoprove of the respondent's action in the premises.
Reviewed by the Board.
Judgment will be entered under Rule 50.
*1945 PHILLIPS and BLACK dissent.