*737 1. During the taxable year the J. W. Carter Co., following a consistent practice, redeemed preferred stock previously issued as a dividend. Held, that the redemption of the said stock constituted a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928.
2. The respondent is sustained in his disallowance of a deduction claimed as a loss on certain bank stock which was not sold nor shown to be worthless during the taxable year.
*201 These proceedings, consolidated for hearing, involve deficiencies in income tax for the year 1930, determined by the respondent as follows:
| C. A. Goding | $10,072.63 |
| H. A. Howe | 398.53 |
Two issues are presented for determination in the case of C. A. Goding - (1) whether the redemption of preferred stock by the J. W. Carter Co. in 1930 should be treated as a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928, or as a sale of the stock by the petitioner, and (2) whether the respondent erred in determining deductible losses*738 claimed in respect of stock of Fourth & First Banks, Inc. Only the first of these issues is involved in the case of H. A. Howe.
*202 FINDINGS OF FACT.
The petitioner, C. A. Goding, is president and general manager of the J. W. Carter Co., a Delaware corporation engaged in the business of manufacturing shoes in Nashville, Tennessee. The petitioner, H. A. Howe, is manager of the factories.
The J. W. Carter Co. was incorporated in April 1922 to succeed a partnership of the same name which was also engaged in the shoe manufacturing business. Immediately after incorporation the stock of the J. W. Carter Co. was held, as follows:
| Stockholder | Preferred stock, par value $100 per share | Shares of common stock, no par value |
| C. A. Goding | $175,000 | 6,120 |
| J. W. Carter | 305,000 | 2,667 |
| H. A. Howe | 37,000 | 1,213 |
| Total | 517,000 | 10,000 |
The preferred stock was nonvoting and provided for the payment of 8 percent cumulative dividends. The assets of the partnership were carried into the books of the corporation as payment for the preferred stock. The common stock was designated as having been issued for good will, which was carried into the books of the corporation*739 at $1. In 1926 the petitioners acquired all of the common stock of J. W. Carter and thereafter Goding owned 8,000 shares and Howe 2,000 shares of the outstanding 10,000 shares of common stock.
From time to time during the period of 1922 to 1929, inclusive, additional preferred stock was issued and at other times during the same interval preferred stock was retired at par. The preferred stock issued and retired during that period and the dates of issue and retirement are shown, as follows:
| Issued | Retired | |
| Issued at incorporation | $517,000.00 | |
| Dividend on common stock, January 1, 1923 | 154,976.42 | |
| Purchased for cash by Carter and Goding | 36,663.58 | |
| Dividend on preferred stock, January 1, 1923 | 41,360.00 | |
| Dividend on common stock, January 1, 1924 | 184,000.00 | |
| Retired January 31, 1924(from H. A. Howe) | $18,000 | |
| Retired January 1, 1926 | 461,000 | |
| Dividend on common stock, January 2, 1927 | 745,000.00 | |
| Retired April 30, 1927 | 325,000 | |
| Retired January 15, 1929 (from J. W. Carter) | 150,000 | |
| Dividend on common stock, January 24, 1929 | 150,000.00 |
The earnings of the J. W. Carter Co. from date of incorporation to December 31, 1929 (taxable net income plus nontaxable*740 items, less income taxes), were as follows:
| 1922 | $42,708.37 |
| 1923 | 153,383.32 |
| 1924 | 262,359.62 |
| 1925 | 249,484.11 |
| 1926 | 164,512.09 |
| 1927 | $148,316.17 |
| 1928 | 270,700.52 |
| 1929 | 238,108.90 |
| Total | 1,529,573.10 |
*203 Surplus at December 31, 1929, as shown by the books, with an adjustment of $3,469.79 to reconcile earnings with the amounts just stated, was $101,910.91.
No cash dividends have ever been paid on the common stock. Cash dividends paid on the preferred stock up to and including the year 1929 are as follows:
| January 2, 1926 | $146,560 |
| January 2, 1927 | 36,400 |
| January 15, 1929 | 140,000 |
| Total | 322,960 |
The following amounts up to and including the year 1929 were charged to surplus account in respect of preferred stock issued as dividends:
| January 1923 | $70,064.42 |
| January 2, 1924 | 184,000.00 |
| January 2, 1927 | 745,000.00 |
| January 24, 1929 | 150,000.00 |
| Total | 1,149,064.42 |
On January 1, 1930, the stock of the corporation was held as follows:
| Stockholder | Shares of common stock | Shares of preferred stock, par value $100 per share |
| C. A. Goding | 8,000 | 5,200 |
| J. W. Carter | None | 2,000 |
| H. A. Howe | 2,000 | 1,300 |
| Bertha A. Goding | None | 250 |
| Total | 10,000 | 8,750 |
*741 On January 2, 1930, the J. W. Carter Co. acquired from J. W. Carter, 2,000 shares of preferred stock, paying therefor $200,000 in cash. This stock was transferred on the books of the corporation to C. A. Goding, Bertha E. Goding, his wife, and H. A. Howe, in the amounts of 1,500 shares, 100 shares, and 400 shares, respectively. The corporation received no consideration for the stock so transferred. The transfer was treated as a dividend and was covered by a charge against surplus in the amount of $200,000, the par value of the stock. On the same date a cash dividend on preferred stock *204 was paid in the amount of $70,000 and, in addition thereto, 800 shares of preferred stock held by Goding and 200 shares of preferred stock held by Howe were retired, the personal account of these stockholders being credited with $80,000 and $20,000, respectively, the par value of the stock so retired.
The balance sheet of the J. W. Carter Co., as of January 1, 1930, showed cash on hand in the amount of $58,833.70.
Neither Goding nor Howe received cash for any of their preferred stock retired during the years 1924, 1926, 1927, 1929, and 1930, but their personal accounts with the*742 J. W. Carter Co. were credited with amounts equal to the par value of the preferred stock on the dates on which it was retired.
The personal accounts of the petitioners with the J. W. Carter Co. at the end of each of the years 1922 to 1929, inclusive, were as follows:
| C. A. Goding | H. A. Howe | |
| Dec. 31, 1922 | $34,391.28 Credit balance | $31.38 Credit balance. |
| Dec. 30, 1923 | 113,360.79 Debit balance | 12,902.14 Debit balance. |
| Dec. 30, 1924 | 302,098.04 Debit balance | 15,936.70 Debit balance. |
| Dec. 31, 1925 | 383,131.37 Debit balance | 33,386.14 Debit balance. |
| Dec. 31, 1926 | 209,171.61 Debit balance | 73,627.22 Debit balance. |
| Dec. 30, 1927 | Account closed | 2,333.55 Debit balance. |
| Dec. 30, 1928 | 72,045.86 Debit balance | 15,889.45 Debit balance. |
| Dec. 30, 1929 | 159,622.47 Debit balance | 35,631.53 Debit balance. |
Goding had been a member of the partnership from 1902 and became president of the corporation at the time of its organization. No formal meetings of the stockholders or directors of the corporation have been held at any time. It has always been managed and controlled entirely by Goding.
Prior to 1930 and over a period of years, Goding acquired, by purchase, *743 stock dividends and stock "split-ups", 638 shares of stock in Fourth & First Banks, Inc., at a total cost of $94,652.80. In 1930, he sold 388 shares of this stock for a total selling price of $51,256, leaving 250 shares which were not disposed of during that year. The sale of the stock was effected through officials of the bank who were instructed to sell all of the petitioner's stock at the market. After selling 388 shares of the stock, the bank officials advised the petitioner that they were unable to sell the remaining shares.
Sales of stock of Fourth & First Banks, Inc., were made on the market in Nashville, Tennessee, at prices ranging from $160 per share on February 1, 1930, to $52.25 per share on December 31, 1930. In 1931 the stock was sold at prices ranging from $16 down to $8 per share, and in 1932 at prices of $8 and $8.50 per share. The sales during the years 1930, 1931, and 1932 were in small lots.
*205 OPINION.
TURNER: On their returns the petitioners treated the redemption of the preferred stock of the J. W. Carter Co. as a sale and reported a profit thereon. In their petitions they allege that the profit so reported was correct. On the basis of*744 amendments to the petition, filed in accordance with leave granted at the hearing, it is now contended that the amounts received in redemption of the stock represented the return of capital and that the petitioners are entitled to refunds.
It is the respondent's contention that the stock was redeemed at such time and in such manner as to bring the transaction within the provisions of section 115(g) of the Revenue Act of 1928 1 and that the distribution and redemption of preferred stock was, under the provisions of that section, a taxable dividend.
*745 A review of the history of the corporation convinces us that the redemption of the stock was in keeping with the consistent practice and method for distributing earnings to its stockholders. Great stress is placed on the statement made on the witness stand by petitioner Goding, that the redemption of the stock was not a part of any unified plan of distributing corporate earnings. Regardless of whether the issuance and redemption of preferred stock was in accordance with any unified plan therefor, it is obvious that it was in accordance with a consistent practice of the corporation from its inception. Except for cash dividends approximating the 8 percent cumulative dividend on the preferred stock, no formal distribution of earnings was ever made, yet we find that prior to January 1, 1930, earnings of the corporation in the amount of $954,000 had been distributed to the stockholders through the issuance and redemption of preferred stock. This was approximately three times the amount that had been distributed as cash dividends on preferred stock.
It is argued by the petitioner that corporate surplus was not available for the distribution of the dividend and that the respondent's*746 case must fall for that reason. While it is true that book surplus at December 31, 1929, was only $101,410.90, and on January 2, 1930, there was a cash dividend of $70,000, as well as a redemption of the preferred stock in question, it must be remembered that the *206 charge to surplus in respect of the preferred stock had been made at the time the stock was issued. The facts show that the earnings of the corporation up to that date were more than sufficient to cover both items. Up to the beginning of the taxable year the corporation had paid cash dividends amounting to $322,960 and had redeemed preferred stock amounting to $954,000, or a total of $1,276,960 over the life of the company. The earnings over the same period amounted to $1,529,573.10 and this amount does not include surplus at April 30, 1922, in the amount of $44,363.23, the source of which is not shown.
Mention is made that in 1926 or 1927 certain bankers complained that the dividend requirements of the petitioner's preferred stock were too high and that this was the occasion for the redemption of at least a portion of the preferred stock. This contention is not at all convincing, however, since the facts*747 show that subsequently the corporation continued to issue preferred stock as dividends and to retire portions thereof at intervals in the same manner as had been done before. According to petitioner Goding's recollection, this criticism of the bankers came shortly after the retirement on January 1, 1926, of preferred stock having a par value of $461,000. In the face of this complaint, however, the corporation, on January 2, 1927, issued as a dividend preferred stock of the par value of $745,000 and on January 24, 1929, issued another dividend in preferred stock amounting to $150,000. In this connection the petitioner cites . The facts here are altogether different from the facts in that case, which there disclosed a purpose and intention of compliance with the recommendation of the bankers for readjusting the capital structure of the corporation. In the light of those facts, there was no basis for the claim that the redemption of the stock was such as to constitute a dividend.
In the present case the petitioner, Goding, directed and controlled all of the activities of the corporation. It appears that the consistent practice was*748 to issue preferred stock against corporate earnings, rather than to pay the earnings to the stockholders in the form of cash dividends. In the meantime, however, the stockholders made substantial withdrawals from the corporation from time to time. At some subsequent date, determined by Goding, the preferred stock so issued as dividends was redeemed and amounts were credited to the accounts of the stockholders equal to the par value of the stock so called in. So far as the record shows, the amounts of preferred stock redeemed, plus cash dividends paid, never at any time exceeded the earnings or profits of the corporation even though the books of the company did not show earnings as such by reason of the charges against surplus at the time the preferred stock was issued. Clearly the redemption of the stock in question was made at such *207 time and in such manner as to constitute the redemption thereof a taxable dividend within the meaning of section 115(g), supra. , affirming *749 ; , affirming ; , affirming .
Furthermore, it does not appear from the record before us that the amounts received in redemption of the preferred stock should be excluded from income, even though it be held that the distribution did not constitute a dividend. If, as the petitioners contend, the issuance and redemption of preferred stock from time to time were not distributions of earnings but distributions chargeable to capital, the facts would indicate that the bisis for preferred stock in the hands of the stockholders had long since been exhausted and under section 115(c) of the Revenue Act of 1928, the entire amount received by the petitioners during the taxable year would be gain from the sale or exchange of property.
The remaining issue has to do with the determination of losses sustained by the petitioner, Goding, from the sale of Fourth & First Banks, Inc., stock. It is stipulated that he was the owner of 638 shares of stock acquired by purchase, exchange, stock dividends, and other*750 methods, at a total cost to him of $94,652.80, and that he sold during the taxable year 388 shares of this stock for a total price of $51,256, leaving 250 shares unsold. It is his contention that the remaining shares of stock became worthless during the taxable year and that he is entitled to a deduction of the balance of cost by reason of the worthlessness of these 250 shares of stock. The facts do not give support to this contention. While the selling price of the stock declined materially and sales were made in small lots only, it appears that the stock sold on December 31 at as much as $52.25 a share, that sales were also made in 1931 at prices ranging from $16 to $8, and in 1932 at prices from $8 to $8.50 per share. It is true that none of these sales involved as much as 250 shares of the stock. They do indicate, however, that the stock was not worthless during the taxable year as claimed by petitioner. There is no showing whatever on the part of the petitioner that the block of stock which remained unsold in 1930 could not have been sold in small lots over a period of time at prices approximating those at which other lots of stock were sold during the years 1930, 1931, *751 and 1932. The loss from the sale of 388 shares is deductible and should be computed on the basis of the stipulated cost of the stock. The remaining 250 shares of stock not having been sold and not being worthless during the taxable year, there is no merit to the petitioners' position on the second issue.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 115. (g) Redemption of stock.↩ - If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redepmtion is made after January 1, 1926.