*32 Decision will be entered for the petitioner.
Held, a certain distribution was not made at such time and in such manner as to be essentially equivalent to a taxable dividend.
*836 The Commissioner determined a deficiency of $ 2,410.27 in the petitioner's income and victory tax for the year 1943. The sole question is, Was the retirement of certain shares of its stock by the Imler Supply Co. in 1942 accomplished at such time and in such manner as to make the distribution and cancellation and redemption essentially equivalent to a taxable dividend? The question arises on the following facts:
FINDINGS OF FACT.
Petitioner is an individual, engaged in business in Pittsburgh, Pennsylvania. He filed his Federal *33 income tax returns with the collector of internal revenue for the twenty-third collection district of Pennsylvania. He kept his books and filed his returns on a calendar year basis and on the cash method of accounting.
During the periods here involved, the petitioner was a stockholder of Imler Supply Co., hereinafter called the company, a Pennsylvania corporation organized in 1923, 654 shares of which company, having a par value of $ 50 per share, were issued for cash at par. The corporation has never paid a stock dividend.
For some time prior to the transaction here involved, the outstanding stock of the company was owned as follows:
| Joseph W. Imler | 219 shares |
| H. R. Birmingham | 275 shares |
| W. W. Lapham | 96 shares |
*837 Previous to December 1, 1941, the company was engaged in the business of retinning and soldering metals and in the rental of excess space in buildings owned by the company. The company owned 5 buildings, consisting of a 7-story brick building and 4 smaller buildings. The main building was equipped with a large freight elevator capable of carrying automobiles. The company rented space in its buildings to the Allegheny County Milk Exchange at a fixed *34 rental of $ 650 per month, the exchange being entitled to whatever space it required for its operations. Prior to December 1, 1941, the exchange used all of the sixth floor of the main building and one-half of the seventh floor. The rental allocable to this space was from $ 100 to $ 125 per floor. The portion of the seventh floor that was not used in the actual operation by the exchange was rented for storing various items of freight, including automobiles.
On December 1, 1941, a fire destroyed the two upper floors of the main building. This building was covered by insurance and in April 1942, the company recovered $ 28,603 as insurance proceeds on account of the fire.
After the insurance proceeds were received, the company obtained an estimate as to the cost of rebuilding the 2 top floors of the main building, which had been destroyed by the fire. It was estimated that the cost would run from $ 40,000 to $ 50,000. The company did not have sufficient cash to rebuild at this cost at that time. Because of war conditions and consequent scarcity of materials, building was difficult. The company decided to remove the 2 top floors of the main building which had been burned out and*35 to place a roof over the fifth floor. It was estimated that the cost of this operation would be $ 15,340. The company thereupon removed the remains of the 2 top floors and placed a roof over the building at the fifth floor, making a 5-story out of what had been a 7-story building.
Petitioner, who was a director of the company, sought out an employee of the Bureau of Internal Revenue at its Pittsburgh office and requested advice as to the treatment to be accorded the leftover fire insurance proceeds. Imler was advised that if the funds were used to retire part of the company stock at par, the transaction would not be taxable as a dividend. Thereupon, at a meeting of the directors of the company held April 6, 1942, a resolution was adopted in which the following appeared:
Mr. Imler stated to the Meeting that the loss occasioned by the fire on December 1, 1941 had been settled with the insurance companies for the sum of $ 28,603.00; that it had been deemed advisable to tear down the walls of the sixth and seventh floors of the seven-story building damaged by fire and not rebuild that portion of the building, so that we now have instead of a seven-story building a five-story building. *36 He further stated that after the payment of repairs and damages caused by the fire that we would have about $ 15,000.00 more cash than was needed to operate the Company. He stated that in his opinion he thought it *838 advisable that the stockholders of the Company sell to the Company and the Company buy from the stockholders 300 shares of the Capital Stock of the Company at $ 50.00 a share totaling $ 15,000.00.
The Secretary presented a list of the Stockholders of the Company which is as follows:
| W. W. Lapham | 96 shares |
| J. W. Imler | 219 shares |
| H. R. Birmingham | 275 shares |
| Treasury Stock | 64 shares |
| Total | 654 shares |
On motion duly seconded it was unanimously
Resolved: That the Company offer to purchase from the following Stockholders the number of shares set opposite their respective names and pay therefor the sum of $ 50.00 per share.
| W. W. Lapham | 49 shares | $ 2,450 |
| J. W. Imler | 111 shares | 5,550 |
| H. R. Birmingham | 140 shares | 7,000 |
| Total | 300 shares | $ 15,000 |
and that said shares be cancelled.
There being no further business to come before the Meeting it was upon motion declared terminated.
The resolution of the board of directors of the company*37 was duly carried out and the stockholders turned in the designated portions of their stock for cancellation, in which transaction the petitioner turned in 111 shares and received $ 5,550 therefor. The stock was actually canceled April 8, 1942.
Petitioner had acquired the 111 shares of stock so turned in for cancellation on the following dates and at the following costs:
| Date of purchase | Shares acquired | Cost |
| 1927 | 64 | $ 4,800.00 |
| 1929 | 29 | 2,668.00 |
| 1929 | 18 | 1,292.04 |
| Total | 111 | 8,760.04 |
The balance sheet of the company as of March 31, 1942, was as follows:
| ASSETS | |||
| Cash | $ 33,690.88 | ||
| Accounts receivable | 1,808.91 | ||
| Inventory: | |||
| Lead, solder, etc | $ 236.73 | ||
| Finished work | 5.56 | 242.29 | |
| Land and buildings: | |||
| Land | $ 20,000.00 | ||
| Buildings | $ 50,785.23 | ||
| Less reserve for depreciation | 28,229.41 | 22,555.82 | 42,555.82 |
| Plant equipment | $ 1,398.55 | ||
| Less reserve for depreciation | 1,300.48 | $ 98.07 | |
| Office equipment | 25.00 | ||
| Unexpired insurance | 570.14 | ||
| Total assets | 78,991.11 | ||
| LIABILITIES | |||
| Accounts payable: | |||
| Pay roll -- due 4/5/42 | $ 407.70 | ||
| Misc. -- current | 158.21 | $ 565.91 | |
| Accrued social security taxes | 35.97 | ||
| Accrued county taxes on real estate | 75.00 | ||
| Accrued fire loss expense | 10,910.54 | ||
| Capital | 32,700.00 | ||
| Treasury stock | 3,200.00 | 29,500.00 | |
| Total liabilities and capital | 41,087.42 | ||
| Surplus | 37,903.69 |
*38 *839 In the following schedule are shown the net profit after taxes, dividends paid, and accumulated earned surplus of the company from 1923 to 1945:
| Net profit | Dividends | Accumulated | |
| Year | after taxes | paid | earned surplus |
| 1923 | $ 1,920.07 | $ 1,920.07 | |
| 1924 | 2,635.94 | 4,556.01 | |
| 1925 | 13,134.07 | 17,690.08 | |
| 1926 | 5,454.83 | 23.144.91 | |
| 1927 | 5,778.80 | 28,924.31 | |
| 1928 | 9,511.94 | 38,436.25 | |
| 1929 | 5,460.13 | 43,896.38 | |
| 1930 | 4,284.07 | $ 5,900 | 42,280.45 |
| 1931 | 1,649.51 | 43,929.96 | |
| 1932 | * (362.43) | 2,360 | 41,207.53 |
| 1933 | (308.78) | 40,898.75 | |
| 1934 | (185.44) | 2,950 | 37,763.31 |
| 1935 | (66.12) | 37,697.19 | |
| 1936 | 54.65 | 37,751.84 | |
| 1937 | (112.26) | 37,639.58 | |
| 1938 | (63.57) | 37,576.01 | |
| 1939 | (2,793.35) | 34,782.66 | |
| 1940 | (1,728.20) | 33,054.46 | |
| 1941 | 4,309.57 | 37,364.03 | |
| 1942 | (269.14) | 37,094.89 | |
| 1943 | 459.28 | 37,554.17 | |
| 1944 | 241.72 | 37,795.89 | |
| 1945 | (459.47) | 2,900 | 34,436.42 |
The cash working capital of the company for some years prior to December 1, 1941, ranged from $ 7,500 to $ 9,000. The cash balance of the company, exclusive of the estimated fire proceeds left after reconstruction of the building, was $ 9,628.76. *39 At that time approximately $ 4,500 had been expended on the damaged building and it was estimated that the total cost of repairing and reroofing the building would amount to $ 15,340. This estimated cost proved to be excessive in the amount of $ 175.81.
*840 Except for the remaining proceeds of fire insurance, the company could not have paid a dividend in the amount of $ 15,000 on April 6, 1942, without borrowing money.
After the building was repaired and reduced in size, Imler Supply Co. discontinued its retinning and soldering activities and has never resumed the same. This cessation of activity was primarily due to the fact that the corporation lacked space for storage of articles required in its retinning and soldering operations, together with the fact that war conditions and scarcity of materials made such operations unprofitable.
The purchase by the company from petitioner in 1942 of 111 shares of the corporation's capital stock for a consideration of $ 5,550 constituted a partial liquidation of the corporation under section 115 (c) of the Internal Revenue Code.
The acquisition and cancellation of the stock of the company in 1942 were not made at such time and in such*40 manner as to be essentially equivalent to the distribution of a taxable dividend within the meaning of subsection (g) of section 115 of the code.
OPINION.
The issue here raised presents a question of fact depending on the circumstances of the particular case. Rheinstrom v. Conner, 125 Fed. (2d) 790; certiorari denied, 317 U.S. 654">317 U.S. 654. No sole or universally applicable test can be laid down. Flanagan v. Helvering, 116 Fed. (2d) 937. The statutory provision is couched in broad terms -- "at such time and in such manner." Though decided cases are not controlling, they are helpful as indicating what elements have been considered important, viz., the presence or absence of a real business purpose, the motives of the corporation at the time of the distribution, the size of the corporate surplus, the past dividend policy, and the presence of any special circumstance relating to the distribution.
In our findings of fact we have indicated our conclusions of fact that the acquisition and cancellation by Imler Supply Co. of certain shares of its capital stock in 1942 were not made at such time and *41 in such manner as to be essentially equivalent to a distribution of a taxable dividend under section 115 (g) of the Internal Revenue Code; or, as stated otherwise, that the transaction constituted a partial liquidation under section 115 (c).
The principal building owned by the company had been damaged by fire in 1941. When the company undertook to repair the building it was found that, because of war conditions, the shortage of building materials, and high costs, it was advisable to abandon 2 damaged floors and reduce the 7-story building to one of 5 stories. The consequence *841 was that the company found its facilities inadequate to carry on the retinning and soldering operations formerly engaged in. Moreover, these operations had proven unprofitable in recent experience because of war conditions and shortage of necessary materials. For these reasons the company discontinued the retinning and soldering operations. This reduction in operations likewise reduced the amount of capital necessary for carrying on the business activities of the company. This was a bona fide contraction of business operations and consequent reduction in capital used. The company thus had a real*42 and legitimate purpose for reducing its outstanding capital stock.
The motives of the corporation were all related to the above business purpose and were, therefore, legitimate and properly conceived. If the excess of insurance proceeds be set to one side, the surplus of the company had remained almost constant for 10 years. The company had followed a conservative dividend policy throughout its history and had not paid a dividend since 1934. The original issuance of the stock had occurred many years before and there was no connection between the issuance and the redemption of the same. There was no special circumstance or condition relating to the distribution excepting the fact that the company had in its hands the excess insurance proceeds which formed the basis of the distribution. We are convinced that, except for the fire and the excess insurance proceeds, there would have been no distribution.
Under the facts here present, the redemption of the company's stock was not accomplished at such time and in such manner as to be essentially equivalent to the distribution of a taxable dividend.
Decision will be entered for the petitioner.
Footnotes
*. Parentheses denote losses.↩