*1331 This proceeding involves a deficiency in income tax for the year 1928 of $912.50, of which $900 is in controversy. Petitioner was a stockholder in one of two national banks which merged to form a new national bank, and the sole issue is whether stock in a securities corporation, acquired with part of the surplus assets of the bank, of which petitioner was a stockholder, which was distributed to petitioner in the taxable year was a dividend paid in property and therefore taxable, or stock in a corporation a party to a reorganization and therefore not taxable.
The parties filed a stipulation of facts to which were attached and made a part thereof copies of the documents showing the course of the transactions involved. Only the pertinent provisions of the documents are set forth in our findings of fact.
FINDINGS OF FACT.
Prior to July 2, 1928, the Merchants National Bank of Baltimore and the Citizens National Bank of Baltimore were two organizations incorporated under the National Banking Act and operating as national banks in the City of Baltimore, *1204 Maryland.
On July 2, 1928, the Merchants National Bank of Baltimore and the Citizens National Bank of Baltimore were merged in accordance with a plan duly provided for by appropriate acts of the board of directors and stockholders of the banks.
At the time of this merger the petitioner was the owner of 5,400 shares of the stock of the Citizens National Bank of Baltimore, and received in exchange therefor 3,600 shares of the stock of the First National Bank of Baltimore, the new merged bank.
On June 29, 1928, the petitioner received a "Certificate of Beneficial Interest" from the trustees of the surplus assets of the Citizens National Bank of Baltimore, representing his interest, 5,400/300,000 in the same assets in the hands of the trustees, the "Certificate of Beneficial Interest" having been issued to the petitioner by virtue of a certain contract between the Citizens National Bank of Baltimore and the trustees, executed on June 29, 1928, the substance of which is hereinafter set out.
There were issued to the petitioner on July 2, 1928, 3,600 shares of the stock of the First National Securities Corporation of Baltimore *1332 (hereinafter called the Securities Corporation), *1205 this stock having been purchased by the trustees of the surplus assets of the Citizens National Bank of Baltimore in accordance with the agreement dated June 29, 1928. The amount paid into the Securities Corporation by the trustees of the surplus assets of the Citizens National Bank of Baltimore for these 3,600 shares of stock issued to petitioner was $4,500 cash.
The First National Securities Corporation of Baltimore was a corporation organized July 2, 1928, under the laws of the State of Maryland, with powers to transact business and engage in dealings, the nature of which was such that the Merchants National Bank of Baltimore, the Citizens National Bank of Baltimore, and the First National Bank of Baltimore would have been prohibited from transacting them under their national bank charters. The trustees of the surplus assets of the Citizens National Bank of Baltimore subscribed for their portion of the Securities Corporation's stock on that date, as provided in the agreement of June 29, 1928, but actual payment for the stock subscribed for by the trustees was not made until July 17, 1928.
The course of the transactions by which petitioner acquired his interest in the Securities*1206 Corporation, here in controversy, as shown by the actions of the board of directors and the stockholders of the Citizens National Bank, the agreement of consolidation and agreement between the bank and trustees, was as follows:
On May 11, 1928, a meeting of the directors of the Citizens National Bank was held, at which the president laid before the meeting a proposed agreement of consolidation with the Merchants National Bank. He also stated that it was proposed that a securities company should be formed under the laws of the State of Maryland, with a capital stock of $400,000, divided into 400,000 shares and with a paid-in surplus of $100,000; that the holders of each share of the new bank would be entitled to one share of the securities company, and that according to very generally accepted practice the share of the securities company would be made a part of the certificate of the shares of the new bank by proper endorsement. The directors approved the plan of merger as set forth in the agreement of merger submitted to that meeting "and as explained and amplified by the president," authorized and empowered the officers to do all acts proper and expedient to carry into effect*1207 the resolutions; appointed three of their number to pass upon the assets, and authorized the calling of a meeting of the stockholders to be held on June 20 to consider the merger and the terms and conditions thereof, as set forth in the agreement, and for the transaction of any other business that might come before the meeting.
*1333 On May 19, 1928, pursuant to the resolution adopted by the directors at their meeting on May 11, notice of a special meeting of the stockholders to be held on June 20, 1928, was sent to all stockholders, the purposes of the meeting being stated in the notice as follows:
To authorize or approve the declaration of a dividend payable in Certificates of Beneficial Interest in whole or in part of the surplus assets of the bank, and the transfer of the whole or part of said surplus assets to a Trustee or Trustees to hold, manage, and dispose of the same, for the benefit of the holders of said Certificates of Beneficial Interest, to consider and approve the plan of merger of this bank with the Merchants National Bank of Baltimore, and such alterations thereof or amendments thereto as may be made at said meeting and for the transaction of any other*1208 business that may come before the meeting.
Enclosed with the notice of the meeting was a letter from the president of the bank bearing the same date, in which he explained fully the plan of merger and the plan for creating a securities corporation.
On May 22, 1928, the directors of the Citizens National Bank again met and approved the plan of merger as set out in the agreement of consolidation presented to the meeting. They also voted to close the stock transfer books at the close of business June 16, 1928, until further action of the board.
On the same date, May 22, 1928, the agreement of consolidation was signed by representatives of both banks. It provided (1) that the Citizens National Bank of Baltimore and the Merchants National Bank of Baltimore "are hereby consolidated under the charter of the said second named association as hereby modified"; (2) that the name of the consolidated association should be the First National Bank of Baltimore; (3) that the amount of the capital stock of the consolidated association should be $4,000,000, divided into 400,000 shares of $10 each; that on the date of consolidation the surplus should be $4,000,000; that the capital, surplus*1209 and undivided profits at the date of consolidation should then aggregate $10,000,000; that of this capital 200,000 shares should be allotted to the then shareholders of the Merchants National Bank of Baltimore, being one-half of a share for each share then held by them, and 200,000 shares should be allotted to the then shareholders of the Citizens National Bank of Baltimore, being two-thirds of a share for each share then held by them; that the assets contributed by each association should from the effective date of the consolidation be passed upon and be acceptable to a committee of six, three to be appointed by the board of directors of each association; and that the shareholders of each bank should furnish net assets equal to $5,000,000 of the capital, surplus and undivided profits of the consolidated bank; that:
Such assets of either association as it shall not consider desirable to carry into the consolidation, or as shall not be necessary to make up its contribution *1334 to the capital, surplus and undivided profits, as aforesaid, shall be transferred by it, before the effective date of the consolidation, to a Trustee or Trustees for the ultimate benefit of its shareholders*1210 upon whatever terms and under whatever conditions shall be deemed proper.
In the event that there is not sufficient net assets in either association to make good its proportion of capital and surplus and undivided profits of Five Million Dollars ($5,000,000.00) herein provided for, the shareholders of the association not having sufficient assets to make good its proportion shall pay the difference in cash.
The agreement also provided that the board of directors of the consolidated bank should consist of no fewer than ten nor more than thirty shareholders, and the persons who should constitute the board for the remainder of the year were named.
By section (4) it was provided that the consolidation should become effective when it had been ratified and confirmed by the affirmative vote of two-thirds of the shares outstanding of each institution and approved by the Comptroller of the Currency of the United States.
At a meeting of the directors held on June 12, 1928, a resolution was adopted, providing in part as follows:
RESOLVED: 1st. That a dividend of fifty cents (50??) per share on the capital stock of this bank, payable on June 30th, 1928, in cash out of the most recently*1211 accumulated earnings of this bank to stockholders of record at the close of business on June 16, 1928, be and it is hereby declared, and that subject to the approval of the stockholders of this bank at a meeting called to meet on the 20th day of June, 1928, a further distribution is hereby declared to be made to the stockholders of this bank of record at the close of business on June 16, 1928, consisting of a dividend of all the earnings of this bank accumulated subsequent to February 28, 1913 and prior to July 1, 1928, if any, and such additional net amount as may be realized from the assets of this bank in excess of Five Million Dollars ($5,000,000.00) to be paid from earnings accumulated prior to March 1, 1913, and paid-in surplus, it being proposed to place in the hands of Trustees all the assets of this bank in excess of Five Million Dollars ($5,000,000.00) for realization; said distribution to be evidenced by Certificates of Beneficial Interest, the payments on which are to be made, when, as and if the proceeds realized from any assets so in the hands of said Trustees justify a payment in the discretion of the said Trustees and subject to the terms and provisions of an agreement*1212 between this bank and Albert D. Graham; John S. Gibb, Jr.; Edward L. Robinson and James D. Harrison (if the execution thereof is authorized by the said stockholders).
At the special meeting of the stockholders held on June 20, 1928, the stockholders ratified the agreement of consolidation, executed on May 22, 1928, the acts of the directors at the meetings of May 11 and 22 and June 12, and the acts of the officers done pursuant thereto; they approved the trustees selected (those named in the resolution quoted above), ratified the form of agreement to be executed by the Citizens Bank and the trustees and authorized the transfer to the *1335 trustees of the surplus assets of the bank; they also approved the plan of forming a securities corporation in the following language:
RESOLVED: - That the proposal to form a corporation to be known as The First National Securities Corporation of Baltimore and the subscription to not more than Two Hundred Thousand (200,000) shares of the capital stock of said corporation at a price not to exceed $1.25 per share by Albert D. Graham, John S. Gibbs, Jr.; Edward L. Robinson and James D. Harrison, Trustees, under an agreement between this*1213 bank and said Trustees, and the payment of the amount of said subscription by the Trustees out of the surplus assets mentioned in said agreement be, and the same are hereby authorized, approved and confirmed. * * *
They specifically ratified the proposed dividend and authorized the delivery by deed of the bank's property to the new consolidated bank.
The agreement between the bank and the trustees was executed on June 29, 1928. By this agreement the bank transferred to the trustees certain scheduled surplus assets upon the following trusts, terms, and conditions: The trustees were to issue to each stockholder certificates of beneficial interest in the surplus assets in an amount of 1/300,000 for each share of stock held by said stockholder on June 16, 1928, after payment of liquidation expenses and of $250,000 for 200,000 shares of the stock of the First National Securities Corporation at $1.25 per share "for the benefit or on behalf of said stockholders of the said Bank who receive their proportionate part of the benefit of said shares of stock of said Securities Corporation, and after the payment from said surplus assets, or the proceeds thereof, of $1.25 in cash to each stockholder*1214 of said Bank who does not receive his proportionate part of the benefits of said shares of stock of said the First National Securities Corporation of Baltimore." The form of the certificate to be used was set forth in the agreement. The trustees were given full power to reduce the surplus assets to cash and to pay over such of said cash to the holders of the certificates of beneficial interest as in their absolute discretion they deemed wise and expedient, but the first money realized, not exceeding $250,000, was to be used for the purchase of the stock of the Securities Corporation and for payment in cash to the stockholders not assenting to the Securities Corporation plan. The agreement further provided:
* * * and the said Trustees shall cause the Certificates representing the said Securities Corporation stock to be endorsed on the stock certificates representing the shares of stock of the First National Bank of Baltimore which are to be delivered to such stockholders of record of the Citizens National Bank of Baltimore as of the close of business on June 16th, 1928, who receive, or are willing to receive, their proportionate part or the benefit of the shares of stock of the*1215 said The First National Securities Corporation to the end that each certificate representing shares of the stock of the First National Bank of *1336 Baltimore to which the stockholders of The Citizens National Bank of Baltimore may be entitled, shall likewise represent and evidence an equal number of shares of the stock of the said Securities Corporation, except as to such of said stockholders who do not receive, or are unwilling to receive, their proportionate part or the benefit of the shares of stock of the said The First National Securities Corporation of Baltimore to which they may be entitled as hereinbefore provided.
The certificates of beneficial interest were dated June 29, 1928, were nonnegotiable and nonassignable on their face and bore the name of the stockholder to whom issued. They certified that the person named was entitled to as many three-hundredth-thousandths of certain surplus assets or proceeds thereof transferred to the trustee under the agreement of June 29, 1928, "and subject to all the terms, provisions and conditions thereof, to which the person or corporation in whose name this certificate is issued, by the acceptance hereof, assents, and to which*1216 said person or corporation all payments hereon or under said agreement will be made, and the fact of said payments or the amount thereof will not be enforsed thereon."
On the back of each certificate of stock in the new consolidated bank, in the case of all stockholders of the bank assenting to the purchase of the Securities Corporation stock, an endorsement was made certifying that the holder was the owner of a like number of shares in the Securities Corporation; that no shares of the stock could be transferred to or owned by any person, firm or corporation unless such person was a stockholder of record of the First National Bank of Baltimore; that their respective proportionate stock interest in the capital stock of the Securities Corporation should always equal and be of like quality and duration as, but never exceed or differ in quality and duration from, their respective proportionate stock interests in the capital stock of the bank and that no stock of the Securities Corporation could be transferred unless accompanied by a transfer of a like number of shares of bank stock. Petitioner's shares in the Securities Corporation were endorsed on his certificate of stock in the First*1217 National Bank.
OPINION.
MATTHEWS: The issue between the parties was stipulated as follows:
Did the distribution of the stock of the First National Securities Corporation of Baltimore, under the actions of the Board of Directors and stockholders of the Citizens National Bank of Baltimore, and the agreement between the said bank and the trustees herein referred to, constitute a taxable dividend from earnings subsequent to February 28, 1913, or was said distribution the distribution, to the stockholders of said bank, of the stock of a corporation, a party to a reorganization in pursuance of the plan of reorganization?
*1337 It is urged upon us by the petitioner that the distribution of the stock in the Securities Corporation was part and parcel of the general plan of reorganization, the Securities Corporation being "a corporation a party to a reorganization," and that the transaction was therefore nontaxable in 1928 under the provisions of section 112(b)(3), (g) and (h) of the Revenue Act of 1928, set out in the margin. 1 The respondent maintains, on the other hand, that the organization of the Securities Corporation was not an integral part of the reorganization within*1218 the meaning of section 112(i), Act of 1928, set out in the margin, 2 and, therefore, that the distribution of stock in the Securities Corporation was the distribution of a taxable dividend within the meaning of section 115(a), Act of 1928, also set out in the margin. 3
*1219 The agreement of consolidation between the two banks provides for the merger of the two banks into one, and for the transfer by each bank, before the effective date of the consolidation, of any assets in excess of the $5,000,000 necessary to make up its contribution to the new corporation "to a trustee or trustees for the ultimate *1338 benefit of its stockholders upon whatever terms and under whatever conditions shall be deemed proper."
The transfer of the surplus assets of the Citizens National Bank, before the effective date of consolidation, to trustees for the ultimate benefit of its stockholders, was carried out by the Citizens National Bank. By proper corporate action, a dividend was declared of all surplus assets, such assets to be transfered to trustees for liquidation and distribution to the stockholders. The stockholders approved the organization of a securities corporation and authorized the purchase of stock in such corporation with the first $250,000 of the proceeds of the surplus assets, such stock to be distributed to the shareholders according to the stock held, or in the case of a nonassenting stockholder, $1.25 for each share such stockholder would have*1220 been entitled to receive. The effect of the declaration of the dividend by the Citizens National Bank of all surplus assets and the subsequent transactions leading to the distribution of the stock of the Securities Corporation was the distribution of a dividend by the Citizens National Bank. There is no evidence that any of the surplus assets were earnings accumulated prior to March 1, 1913.
Neither the two national banks which merged nor the new bank could lawfully have engaged in the business which the Securities Corporation was organized to transact. The agreement of consolidation between the two banks - which is the plan of reorganization - did not provide for the organization of a securities corporation.
While the Securities Corporation was organized during the time the consolidation of the two banks was being effected, it was not a party to such reorganization and is not a corporation resulting from such reorganization. It resulted from the action of the stockholders in authorizing that a part of the surplus assets declared as a dividend should be used in acquiring stock in the Securities Corporation.
*1221 The cases of ; affd., ; certiorari denied, ; ; affd., , are quite similar in essential facts and the conclusion here reached is in accord with the conclusions reached in those cases. See also . We hold, therefore, that the distribution of the stock of the First National Securities Corporation of Baltimore to the stockholders of the Citizens National Bank of Baltimore constitutes a taxable dividend from the earnings subsequent to February 28, 1913. The determination of the respondent is approved.
Reviewed by the Board.
Judgment will be entered for the respondent.
Footnotes
1. SEC. 112. (b)(3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in sucb corporation or in another corporation a party to the reorganization.
* * *
(g) Distribution of stock on reorganization. - If there is distributed, in pursuance of a plan of 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 distributee from the receipt of such stock or securities shall be recognized.
(h) Same - effect on future distributions.↩ - The distribution, in pursuance of a plan of reorganization, by or on behalf of a corporation a party to the reorganization, of its stock or securities or stock or securities in a corporation a party to the reorganization, shall not be considered a distribution of earnings or profits within the meaning of section 115(b) for the purpose of determining the taxability of subsequent distributions by the corporation.
2. SEC. 112. (i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the 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, 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.
(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. ↩
3. SEC. 115. (a) Definition of dividend.↩ - The term "dividend" when used in this title (except in section 203(a)(4) and section 208(c)(1), relating to insurance companies) means any distribution made for a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.