*2328 1. A transaction which involved the exchange of common corporate stock for common and preferred stock of another corporation plus cash, held to have resulted in taxable gain.
2. In the reorganization of a corporation 7,545 of its 15,800 shares of common stock were purchased from stockholders for $754,515 in cash; 2,114 shares were exchanged for 14,125 shares of the common stock of a new corporation organized to acquire and conduct the business of the old. The remainder of the common stock of the old corporation was acquired by the new, at varying rates, in exchange for its common, or preferred stock and cash, or for common and preferred stock without cash. Held, under the facts shown, that the petitioner, who, as a result of individual bargain, received both cash and stock in exchange for his stock in the old corporation, was not a distributee of taxable dividends within the provisions of section 203(d)(2) of the 1926 Revenue Act.
*771 The respondent has asserted a deficiency in income tax for the year 1925 in the amount of $1,906.34. *2329 For his causes of action the petitioner alleges (1) that the respondent erroneously increased his income for the taxable year by including therein the amount of $18,086.69 in excess of the gain realized in the disposition of certain shares of stock, (2) that he realized no gain from such disposition, and (3) that in any event the amounts received are not subject to normal tax. The proceeding was submitted on the following stipulation of facts.
STIPULATION OF FACTS.
1. The petitioner is an individual residing in Kansas City, Mo., and during the year 1925, and prior years, was a stockholder of the Kansas City Bolt & Nut Co.
2. During the year 1916 and subsequent years, petitioner acquired shares of stock of the Kansas City Bolt & Nut Co. as follows:
| Date acquired | Number of shares | Cost |
| January, 1916 | 188 | $12,533.33 |
| February, 1920 | 95 | 9,500.00 |
| June, 1920 | 45 | 5,500.00 |
| May, 1921 | 66 | 6,600.00 |
| August, 1921 | 40 | 4,000.00 |
| 434 | 38,133.33 | |
| 1922 stock dividend | 217 | |
| 651 | 38,133.33 |
*772 3. During the year 1925 petitioner sold 10 shares of stock of the Kansas City Bolt & Nut Co. at $85 per share, realizing a profit of $264.23. In the same*2330 year, he sold 50 shares of said stock at $87.50 per share, realizing a profit of $1,446.17.
4. Pursuant to a plan of reorganization as set forth in Exhibit "A," attached hereto and made a part hereof, the Sheffield Steel Corporation was organized October 1, 1925, under the laws of the State of Delaware, for the purpose of acquiring the stock and assets of the Kansas City Bolt & Nut Co., and thereafter operating the business formerly conducted by the said Kansas City Bolt & Nut Co.
5. After the acquisition of the stock of the Kansas City Bolt & Nut Co., its assets were transferred to the books of the Sheffield Steel Corporation, and its capital stock was reduced to $2,000, and thereafter it remained dormant.
6. In October, 1925, petitioner exchanged his remaining 591 shares of stock of the Kansas City Bolt & Nut Co. for the following:
| Cash ( $50 a share) | $29,550 |
| Preferred stock, Sheffield Steel Corporation | 236 shares |
| Common stock, Sheffield Steel Corporation | 591 shares |
7. The preferred stock of the Sheffield Steel Corporation had a par value $100of per share and a fair market value of $90 a share at the time of the exchange. The common stock of the*2331 Sheffield Steel Corporation had no par value, and when the exchange was made had a fair market value of $20 a share.
8. In reporting this transaction in his income-tax return for 1925, petitioner reported a profit of $10,482.17, representing the difference between the cost of the 591 shares of common stock of the Kansas City Bolt & Nut Co., namely, $40,307.83, and cash received, namely, $29,550, plus $21,240, representing the value of 236 shares of stock of the Sheffield Steel Corporation at $90 a share, a total of $50,790.
9. In determining the taxable profit from the foregoing transaction, the respondent held that the gain amounted to $27,991.29. The fair market value of the preferred and common stock of the Sheffield Steel Corporation, at the time of the exchange, was $90 and $20, respectively.
10. Fifty-seven stockholders owning a total of 1,025 shares took advantage of the offer set forth in Exhibit "A" of exchanging one share of common stock of the Kansas City Bolt & Nut Co. for $40 in cash, one-half share of Sheffield Steel Corporation preferred stock, and one share of Sheffield Steel Corporation common stock.
11. The remainder of the stockholders of the Kansas*2332 City Bolt & Nut Co. accepted offers which were a modification in each case of the offer set forth in Exhibit "A." The petitioner varied from the offer set forth in Exhibit "A," in that he accepted $50 in cash instead *773 of $40, and two-fifths of a share of stock of the preferred stock of the Sheffield Steel Corporation instead of one-half a share of such stock. Petitioner received 591 shares of common stock of the Sheffield Steel Corporation for his 591 shares of common stock of the Kansas City Bolt & Nut Co.
12. The following tabulation sets forth the offer accepted in the case of each share of stock:
| Common stock - K. C. Bolt & Nut Co. | Cash | Preferred | Common |
| 7,094 | 100 | ||
| 197 | 50 | 25 | 1 |
| 158 | 75 | 25 | |
| 445 | 75 | 1 1/2 | |
| 236 | 75 | 1 1/2 | |
| 100 | 75 | 1 1/2 | |
| 252 | 50 | 25 | 1 1/2 |
| 1,637 | 50 | 41 | 1 |
| 448 | 100 | ||
| 3 | 105 | ||
| 1 | 90 | 1 | |
| 2,066 | 75 | 1 1/2 | |
| 15 | 90 | 1 | |
| 9 | 90 | 1 | |
| 1,025 | 40 | 50 | 1 |
| 2,114 | 14,125 |
13. There was a total of 15,800 shares of Kansas City Bolt & Nut Co. common stock. This was exchanged as follows:
| Cash | $1,011,445.00 |
| Preferred Stock - Sheffield Steel Corp | $250,000.00 |
| Common Stock - Sheffield Steel Corporation - no par | 48,534 shares |
*2333 14. After organization the Sheffield Steel Corporation had outstanding 12,500 shares of preferred stock, of which 2,500 shares were issued to the stockholders of the Kansas City Bolt & Nut Co. The balance of such preferred stock of the Sheffield Steel Corporation was sold to brokers and distributed to others for purposes connected with the organization of the Sheffield Steel Corporation.
15. After organization, the Sheffield Steel Corporation had outstanding 75,000 shares of common stock of no par value, of which 48,534 shares were issued to the stockholders of the Kansas City Bolt & Nut Co., and the balance was sold to brokers and distributed to others, for purposes connected with the organization of the Sheffield Steel Corporation.
16. The capital and surplus of the Kansas City Bolt & Nut Co. on September 30, 1925, were as follows:
| Common stock | $1,500,000.00 |
| Preferred stock | 400,000.00 |
| Bonds | 1,250,000.00 |
| Earned surplus | 730,010.75 |
17. A 50 per cent common stock dividend was declared and distributed to the stockholders in 1922. The surplus set forth in paragraph sixteen hereof represents earned surplus and not paid-in surplus.
*774 Exhibit*2334 "A".
THE KANSAS CITY BOLT & NUT COMPANY SHEFFIELD STEEL MILLS.
KANSAS CITY, MO., October 24, 1925.
To Holders of Common Stock of The Kansas City Bolt & Nut Co.:
The growth of The Kansas City Bolt & Nut Co. during the last few years has been so substantial that it is now desirable to conduct the business under a name which will better indicate its major business, and also to make its financial structure such that enlargement, if required, can be provided in the most economical way.
For these and other reasons, there has been organized the SHEFFIELD STEEL CORPORATION with an issued capital of $1,250,000 of 7% Cumulative Preferred Stock and 75,000 shares of no par value Common Stock. The Sheffield Steel Corporation will buy the Common stock of The Kansas City Bolt & Nut Co. from the individual holders on the following basis:
For each share of The Kansas City Bolt & Nut Co. common stock, the Sheffield Steel Corporation will give $40.00 in cash, 1/2 share of Sheffield Steel Corporation 7% Cumulative Preferred Stock, par value $100.00 per share, and 1 share of Sheffield Steel Corporation common stock.
Considerably over 90% of the common stock of The Kansas City*2335 Bolt & Nut Co. has already been placed under contract. While it is not necessary that all of the common stock should come in, I would be greatly pleased if the action might be made unanimous. The common stock should be turned in either to me or Prescott, Wright, Snider Company, Bankers, 918 Baltimore Avenue, or to the New England National Bank and Trust Company, or notice of intention given before close of business on Saturday, October 31st.
It is expected that the distribution of the new securities and cash will be ready within a few days after that date.
If any of the holders of common stock of the Bolt & Nut Company so desire, Prescott, Wright, Snider Company will give $65.00 cash for each half share of Sheffield Steel Corporation Preferred Stock, accompanied by one share of common stock, so that any such holder so electing will receive $105.00 in cash for each share of Bolt & Nut Company common stock, providing notice of such election is given on or before Saturday, October 31st.
For your confidential information, I am enclosing balance sheet of the Sheffield Steel Corporation, based upon the statement of the Kansas City Bolt & Nut Company as of September 30, 1925, as*2336 it will appear on completion of the present financing.
I am also enclosing form of agreement for stockholders to sign if they wish to avail themselves of this offer. Please note that this agreement should be handed in together with the certificate, by Saturday, October 31, 1925. Suitable receipts will be given by Prescott, Wright, Snider Company, Bankers, or the New England National Bank and Trust Company, pending the completion of the exchange.
It is very desirable to complete this transaction with as little delay as possible. We feel sure that you will appreciate this fact and that we shall have your cooperation.
Yours very truly,
W. L. ALLEN, President.
KANSAS CITY BOLT & NUT CO.
2 enclosures
*775 OPINION.
LANSDON: The petitioner contends (1) that he realized no profit from the transaction set forth in the stipulation; (2) that if any profit was realized, it was not in excess of $24,302.17; and (3) that if he received taxable income as a result of the corporate reorganization in question the amount of $21,557.44 was in effect a dividend and is subject to surtax only.
The stipulated facts clearly show that the acquisition of the capital stock*2337 and assets of the Kansas City Bolt & Nut Co., hereinafter sometimes called the Company, by the Sheffield Steel Corporation, hereinafter sometimes called the Corporation, constituted a reorganization within the meaning of section 203(h)(1) of the Revenue Act of 1926. All of the stock and all of the assets of the Company were acquired by the Corporation in exchange for cash and shares of its common and preferred stock. It is equally obvious that the reorganization does not come within the provisions of section 203(b)(2) of the Act of 1926, which is as follows:
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 such corporation or in another corporation a party to the reorganization.
The transaction, therefore, was not one from which gain or loss may not arise and be recognized for Federal tax purposes.
The situation disclosed by the stipulation is governed by section 203(d)(1) of the Act of 1926, which is as follows:
If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for*2338 the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
In the instant case the stipulation indicates a taxable gain and includes all the date necessary to the computation thereof. The 591 shares of the Company which the petitioner exchanged for cash and shares of the Corporation were all acquired subsequent to March 1, 1913, at a total cost of $34,618.71. In exchange for such shares, petitioner received cash in the amount of $29,550,236 shares of the preferred stock and 591 shares of the common stock of the Corporation. It is agreed that the fair market value of the preferred stock was $90 and of the common stock, $20 per share. The total consideration which the petitioner received for his 591 shares of the common stock of the Company was $62,610, which exceeded the cost thereof in the *776 amount of $27,991.29, which was the taxable gain realized from the exchange.
*2339 The stipulation discloses that at the date of the reorganization the Company had earned surplus in the amount of $730,010.75. Petitioner contends that even if the exchange was one in which gain may be recognized, the greater part of the cash which he received should be regarded as a dividend representing his proportionate share of the surplus of the Company, and that such a dividend is subject to surtax only. In support of this claim he relies on section 203(d)(2) of the Act of 1926, which is as follows:
If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.
If the alleged distribution was "made in pursuance of a plan of reorganization," it would seem that this contention is sound. An examination*2340 of the stipulation and of Exhibit "A" attached thereto, however, discloses the fact that as between this petitioner, as well as several other stockholders of the Company, the transaction in question was not "in pursuance of a plan of reorganization." Under the plan outlined in the circular letter to shareholders of the Company, each stockholder was asked to turn in his stock and receive for each share $40 in cash, one-half a share of the preferred stock and one share of the common stock of the Corporation. The petitioner did not accept this offer, but dealt individually and to his advantage with the Corporation, and, for each of the 591 shares of the Company which he turned in, received $50 in cash, two-fifths of a share of the preferred stock and one share of the common stock of the Corporation. It is obvious, therefore, that the transaction between the petitioner and the Corporation was not in pursuance of a plan of reorganization, but was an individual deal in which one party sold and the other purchased shares of stock at a price that was mutually acceptable, but materially different from the terms set out in the reorganization plan. We are of the opinion, therefore, that the*2341 entire amount of $27,991.29 was realized gain and is taxable as such.
Reviewed by the Board.
Decision will be entered for the respondent.