*1157 Because of a desire to assure itself of the services of its president, petitioner optioned 8,000 shares of its capital stock to him at a price slightly over its then market value, in consideration for which its president agreed to serve as such officer, at his then prevailing compensation, for five years more. During the fiscal year ending October 31, 1937, petitioner sold 1,500 shares of its previously purchased stock to its president under this option and, in the same year, sold 1,000 of the purchased shares released by its president and an additional 1,000 shares to key employees at a profit of $1,525.87. Held:
(1) Such profit is taxable to petitioner under section 22(a) of the Revenue Act of 1936.
(2) Article 22(a)-16 of Regulations 94 is a valid and effective interpretation of that section in its application to profits realized by a corporation from sales of its stock.
*212 Respondent determined a deficiency in the amount of $1,088.52 in income tax against the petitioner for the fiscal year ending October 31, 1937. Respondent has conceded*1158 error in two of the three issues raised by the pleadings. The sole issue submitted is whether the petitioner is taxable upon gain realized upon the purchase and sale of its own stock. We find only such facts as are pertinent to a decision of the issue submitted.
*213 FINDINGS OF FACT.
Petitioner is a corporation organized and existing under the laws of the State of New York, with its principal office at St. Louis, Missouri. It kept its books and made its returns on the accrual basis for the fiscal taxable year ended October 31, 1937. It filed its income tax returns for that year with the collector for the first district of Missouri.
On January 5, 1932, petitioner entered into a contract with its president, John A. Bush, by which he agreed to continue to serve as president for a further period of five years beginning January 1, 1932, provided that he should be annually elected to such position by the board of directors, and on the same basis of salary and compensation as that prevailing for the year 1931. In consideration for this agreement, the petitioner granted to John A. Bush an option to purchase from it 8,000 shares of its no par common capital stock at a*1159 price of $35 per share, payable from time to time as the option was exercised. This stock then had a fair market value of $33 1/2 per share. The agreement further provided that the president could not take under the option more than 800 shares per year during the first five years beginning January 1, 1932, and that after the first five years he could take any part of the optioned shares in such number and at such times as he might elect, provided that the option should expire on December 21, 1941, as to all shares not previously bought and paid for. This option was not assignable during the lifetime of John A. Bush, but provided that, if his death should occur after the completion of the five-year term of service to which he had agreed, his personal representative should succeed to all of his then existing rights to purchase. If his death should occur before the completion of the five-year term of service, his personal representative might purchase that number of shares which bears the same proportion to the 8,000 shares as the actual time of his service after the date of the above mentioned agreement bears to the full term of five years, less such shares as John A. Bush had purchased*1160 in his lifetime. The petitioner further undertook to have the shares available for delivery to John A. Bush against payment therefor, under the terms of the contract.
Petitioner entered into the above mentioned option agreement with its president because the board of directors believed that its president was being underpaid for what they considered the excellent work he was doing for the company, and that such option would assure petitioner his continued services for a further period of five years on the basis of his then prevailing compensation.
On January 5, 1932, petitioner did not own any shares of its capital stock and had never theretofore repurchased any issued shares. Beginning *214 in April 1932, the petitioner began to purchase its own capital stock for the purpose of providing shares with which to meet the above mentioned option to John A. Bush, its president. The issue of petitioner's common stock was small and had a thin market. Its directors feared that the exercise of the option by John A. Bush might force the company to purchase such stock at high prices in order to meet the option.
During the fiscal year ended October 31, 1937, John A. Bush exercised*1161 the option to the extent of 1,500 shares and paid petitioner $35 per share therefor. During the same fiscal year he released the option as to another lot of 1,000 shares upon the condition that such shares be offered to a group of key employees of the company at the option price of $35 per share. Petitioner accepted this offer and purchased on the open market another block of 1,000 shares. These 2,000 shares on May 1, 1937, were allotted to a group of key employees of petitioner and on May 12, 1937, these 2,000 shares of petitioner's common capital stock were sold to key employees of petitioner at a price of $41.11 per share.
On its sale of 1,500 shares of its stock to John A. Bush, and 2,000 shares to certain of its key employees, during the fiscal year ended October 31, 1937, petitioner realized a profit of $1,525.87. This profit was transferred on the books of petitioner to "earned surplus account", and was not reported for Federal income tax purposes.
Petitioner has never sold any of its own capital stock through an outside person or dealer or to any one not connected with the company.
OPINION.
LEECH: Respondent has taxed the petitioner upon the difference on the*1162 price it paid and that received for its stock sold in the taxable year to its president and certain employees. Whether authority existed for this action presents the only issue.
The Revenue Act of 1936 applies. Respondent argues that section 22(a) of that act is effectively construed by Regulations 94, article 22(a)-16, 1 and supports the tax. Petitioner contends that the *215 quoted regulation is not a valid interpretation of the statute and, even if so, it precludes the contested tax since, it is argued, in carrying on the transactions giving rise to the tax, the petitioner was not dealing in its own stock "as it might in the shares of another corporation."
*1163 Of course the intention of Congress, as expressed in section 22(a), supra, is controlling. But section 22(a), the provisions of which have appeared in every revenue act without pertinent change since that of 1916, is so general in its terms as to be the appropriate subject of an interpretative regulation. Commissioner v. Reynolds Tobacco Co.,306 U.S. 110">306 U.S. 110; First Chrold Corporation v. Commissioner,306 U.S. 117">306 U.S. 117. Until May 2, 1934, respondent by regulation had consistently construed the provision as meaning that the corporation realized no gain and sustained no loss upon purchases and sales of its own stock. National Home Owners Service Corporation,39 B.T.A. 753">39 B.T.A. 753. On May 2, 1934, respondent issued T.D. 4430, reported in C.B. XIII-1, p. 36, amending the outstanding regulations as follows:
* * * Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. * * *
But where a corporation deals in its own shares as it*1164 might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. * * * Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of applicable statutes.
In National Home Owners Service Corporation, supra, we held that the regulations, as amended by T.D. 4430, supra, was not an effective interpretation of section 22(a) as passed by Congress in the Revenue Act of 1934, on May 3, 1934. The basis for that decision was that "Congress, in enacting that act, can not be presumed to have had in mind the regulation as amended."
Here we are concerned with the prospective application of the Revenue Act of 1936 passed by Congress on June 20, 1936. See Helvering v. Wilshire Oil Co.,308 U.S. 90">308 U.S. 90. True, section 22(a) of the 1934 Act was there reenacted without change, but, when Congress passed the 1936 Revenue Act, the regulations, as amended by*1165 T.D. 4430, supra, appearing without further change as article 22(a)-16 in Regulations 86, promulgated under the 1934 Act, had been outstanding for more than two years. In such situation, we think that, by passing the 1936 Act, Congress approved the interpretation of section 22(a) announced in the regulations as amended by T.D. 4430, supra, and in article 22(a)-16 of Regulations 86, and thus authorized the repetition of that interpretation in article 22(a)-16 of Regulations *216 94 issued under the latter act. This interpretation was therefore valid and effective during the tax year. Helvering v. Wilshire Oil Co., supra;Trinity Corporation,44 B.T.A. 1219">44 B.T.A. 1219; see also Elizabeth G. Augustus,40 B.T.A. 1201">40 B.T.A. 1201; affd., 118 Fed.(2d) 38; cf. Squibb & Sons v. Helvering, 98 Fed.(2d) 69; 2 modified, 102 Fed.(2d) 681.
Were the present transactions of petitioner*1166 in its own stock taxable under section 22(a) of the Revenue Act of 1936 as construed by Regulations 94, article 23(a)-16? We think they were.
Under the circumstances, the intention of respondent as expressed by such regulations is controlling. Section 22(a) defines income as including "gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property * * *." The Supreme Court, in Helvering v. Clifford,309 U.S. 331">309 U.S. 331, said: "The broad sweep of this language [section 22(a)] indicates the purpose of Congress to use the full measure of its taxing power within those definable categories." In Commissioner v. Woods Machine Co., 57 Fed.(2d) 635; certiorari denied, 287 U.S. 613">287 U.S. 613, the Circuit Court of Appeals reversed the Board and held that:
Whether the acquisition or sale by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction involved. *1167 Walville Lumber Co. v. Com. of Internal Revenue35 F.(2d) 445; Spear & Co. v. Heiner54 F.(2d) 134. If it was in fact a capital transaction, i.e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation, the Board rule applies. Doyle v. Mitchell Bros. Co.247 U.S. 179">247 U.S. 179, 184; Eisner v. Macomber,252 U.S. 189">252 U.S. 189. But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. * * *
Respondent, thereafter, promulgated T.D. 4430, supra, amending the then existing regulations which, as thus amended, were repeated as article 22(a)-16 of Regulations 86 and 94.
Thus, it seems scarcely possible that either respondent in so amending the regulation or Congress in approving it intended to limit the application of section 22(a) to an extent both must be presumed to have then*1168 known was unnecessary. Helvering v. Wilshire Oil Co., supra;Elizabeth G. Augustus, supra.Cf. National Home Owners Service Corporation, supra.Yet that is the position of petitioner. Commissioner v. Woods Machine Co., supra;Commissioner v. Boca Ceiga Development Co., 66 Fed.(2d) 1004; Johnson v. Commissioner, 56 Fed.(2d) 58; certiorari denied, 286 U.S. 551">286 U.S. 551; Dorsey Co. v. Commissioner, 76 Fed.(2d) 339; *217 certiorari denied, 296 U.S. 589">296 U.S. 589; Allyne-Zerk Co. v. Commissioner, 83 Fed.(2d) 525; Houghton & Dutton Co.,26 B.T.A. 52">26 B.T.A. 52; E. F. Simms,28 B.T.A. 988">28 B.T.A. 988; William L. James,30 B.T.A. 491">30 B.T.A. 491; and Griswold Co.,33 B.T.A. 537">33 B.T.A. 537. It singles out the provision in article 22(a)-16, Regulations 94, which reads: "But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another." This sentence, *1169 it is argued, limits the transactions in its own stock upon which a corporation realizes a taxable gain to those there described. But, assuming the existence of the doubtful premise that petitioner did not so deal with its own stock here and would not have done so, if necessary to hold its valued employees, or otherwise, petitioner "might" have so bought and sold the stock of another corportion.
However, there is another and, we think, fatal weakness in petitioner's position. The meaning of the pertinent regulation must be gathered from its entire context. Inconsistencies and contradictions must be avoided so far as possible. The first sentence of this regulation is: "Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances." It is apparent that to give controlling effect to the sentence of the regulation to which petitioner points would require the elimination of the condition named in the quoted first sentence that the taxable character of the transaction "depends" upon "the real nature*1170 of the transaction." In our opinion, "the real nature of the transaction" is the determinant under this regulation, which fixes the taxable status of transactions of a corporation in its own stock. The rest of the regulation includes only examples of such transactions to facilitate the intended delineation of that "real nature."
The stock involved here was not canceled and then reissued. The capital structure of petitioner was not affected. No capital transaction, in fact, occurred. It is admitted that the stock was purchased for resale and sold. The limited field of purchasers and the bargain prices at which some of the stock was sold indicates only the reason for such purchases and sales. See Chrysler Corporation,42 B.T.A. 795">42 B.T.A. 795.
Respondent is sustained.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK dissents.
Footnotes
1. ART. 22(a)-16. Acquisition or disposition by a corporation of its own capital stock. - Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Act. ↩
2. It is to be noted that this case was decided by the Second Circuit Court of Appeals before the Supreme Court decided Helvering v. Wilshire Oil Co., Inc., supra.↩