*983 Held, that certain corporate dividends received by the petitioner during the taxable years were liquidating dividends and not ordinary dividends.
*282 These proceedings, duly consolidated for hearing, are for the redetermination of deficiencies in income tax for the years 1926 and 1927 in the amounts of $1,210.17 and $141.60, respectively. The issue is whether corporate dividends received by the petitioner during the taxable years constituted liquidating dividends or ordinary dividends.
FINDINGS OF FACT.
At the hearing the parties filed a written stipulation of facts, including certain documents attached thereto as exhibits. The stipulation is by reference adopted as our findings of fact, but only so much thereof as we deem essential to a consideration of the issue presented is here set forth, as follows:
The petitioner is an individual, residing at 180 Rieverside Drive, New York City.
On April 9, 1926, the petitioner was the owner of 60 shares of the common capital stock of Jefferson Distilling & Denaturing Co. of the par value*984 of $100 per share, which had been acquired by him at a cost price of $6,400. On that date there were 2,500 shares of such stock outstanding.
On April 9, 1926, the Jefferson Distilling & Denaturing Co. transferred its entire assets to the American Solvents & Chemical Corporation in consideration of the payment by the American Solvents & Chemical Corporation of 12,166 shares of the preferred stock of the latter company and cash in the sum of $1,445,520.
The contract of April 9, 1926, by and between the Jefferson Distilling & Denaturing Co. and the American Solvents & Chemical Corporation contained, inter alia, the following provision:
At the time of the execution of the act of sale the Jefferson Company will cause Charles Bacharach to deliver to the Purchaser an agreement whereby he will agree that he will not for a period of (5) years from said date engage in the business of manufacturing, producing, selling, distributing, or the trading in or dealing in alcohol, or by-products thereof in any form whatsoever, in any manner as principal or agent or otherwise, in any part of the United States of America, outside of the States of Nevada and Wyoming, either directly or indirectly*985 as an individual or member of a partnership, or as an officer, employee, agent, director, or stockholder of any corporation or promote or participate in the *283 organization of any partnership or corporation for such purposes, but said agreement may reserve to Charles Bacharach the right to continue to own the minority interest in the stock of W. H. Barber Industrial Alcohol Company, Incorporated, owned by him at the date hereof and to act as a director thereof. The Jefferson Company hereby agrees that in the event of the consummation of the act of sale, it will not from said date engage in the business of manufacturing, producing, selling, buying, distributing, or handling or transporting alcohol, its products or by-products in any form whatsoever, as principal or agent or otherwise either directly or indirectly, or in any manner whatsoever, that it will co-operate with the Purchaser in all reasonable respects in the furtherance of the conduct of the business transferred, and that upon the written request of the Purchaser it will change its corporate name and will make its present name available to the Purchaser, and that without the written consent of the Purchaser it will*986 not dissolve or go into liquidation until the Purchaser shall have secured the necessary permits to operate the business of the manufacture and sale of alcohol which the Purchaser binds and obligates himself to obtain with all proper expedition.
On April 12, 1926, the Jefferson Distilling & Denaturing Co. made a distribution of $590 per share in cash on 2,500 shares of its outstanding common capital stock. The total amount of the distribution was $1,475,000. Of this distribution the petitioner received the sum of $35,400.
On November 8, 1926, the Jefferson Distilling & Denaturing Co. made a distribution $5of per share in cash on 2,500 shares of its outstanding common capital stock. The total amount of the distribution was $12,500. Of this distribution the petitioner received $300.
On August 1, 1927, the Jefferson Distilling & Denaturing Co. made a distribution of $28 per share in cash on 2,500 shares of its outstanding common stock. The total amount of the distribution was $70,000. Of this distribution the petitioner received $1,680.
On October 31, 1927, the Jefferson Distilling & Denaturing Co. made a distribution of $50 per share in cash on 2,500 shares of its outstanding*987 common stock. The total amount of the distribution was $125,000. Of this distribution the petitioner received $3,000.
At the time the distributions of April 12, 1926, November 8, 1926, and August 1, 1927, were made the Jefferson Distilling & Denaturing Co. had accumulated earnings and profits in excess of the sums distributed.
At the time the distribution of October 31, 1927, was made the Jefferson Distilling & Denaturing Co. had accumulated earnings and profits of $46,358.50.
At a meeting of the board of directors of the Jefferson Distilling & Denaturing Co. held on April 12, 1926, the following resolutions were adopted:
WHEREAS the profits made by this corporation over a series of years since its organization have been reduced to cash, according to the statement of the president just made and whereas it is deemed advisable to distribute the greater *284 part of said profits to the stockholders of this corporation by way of cash dividend.
RESOLVED that a dividend of $590.00 per share be and the same is hereby declared, payable immediately to stockholders of record on the books of the company as of date.
RESOLVED that the president of this company be and he*988 is hereby authorized, to rent an office for this company in New Orleans for such time and on such terms and conditions as he may see fit and likewise when and as he sees necessary to employ an accountant to take charge of the books of this company.
At a meeting of the board of directors of the Jefferson Distilling & Denaturing Co. held on November 2, 1926, the following resolutions were adopted:
RESOLVED, That in the judgment of this Board of Directors it is advisable and for the benefit of this corporation that it be dissolved and that, accordingly, a meeting of the stockholders of this corporation to take action upon this resolution should be held at the hour of 11 o'clock A.M., on the 23rd day of November, 1926 at the office of this corporation, which for the purpose of said meeting is fixed at the office of Leo A. Marrero, of Marrero, Louisiana, in the Gretna Trust & Savings Bank Building.
RESOLVED, that a dividend of $5.00 per share be declared payable at once to all stockholders of record as of November 2nd, 1926.
A meeting of the stockholders of the Jefferson Distilling & Denaturing Co. was held on November 23, 1926, at which time the president of the company, in*989 discussing the purpose of the meeting, stated that the company had a claim for a large sum of money against the Federal Government which had not been paid, and also that there was a lawsuit pending against the company. The president then suggested that, in view of the amount due by the Government not having been paid, he thought it was advisable to delay the dissolution of the corporation until such payment was made. The stockholders thereupon adopted a resolution directing that the stock of the American Solvents & Chemical Corporation belonging to the Jefferson Distilling & Denaturing Co. be not distributed to the stockholders of the latter company, but that said stock be held intact and disposed of in whole or in part at such time, at such price, and on such terms and conditions as the board of directors might see fit.
Prior to December 31, 1927, the petitioner did not surrender for cancellation or redemption any part or portion of the certificates of stock of the Jefferson Distilling & Denaturing Co.
Article III of the charter of the Jefferson Distilling & Denaturing Co. provided as follows:
The objects and purposes for which this corporation is organized and the nature*990 of the business to be carried on by it are hereby declared to be: to manufacture any and all kinds of alcohol and spirits and to buy, sell, import, export, distribute and generally deal therein, and in any and all materials and articles required or connected with such manufacture, or with the handling of *285 said products; to acquire and operate warehouses as a public warehouseman; to issue negotiable warehouse receipts and conduct a United States bonded warehouse or warehouses; to do a cooperage business; to manufacture feed stuffs from raw material or from the by-products of its alcohol factory or factories; and generally to do any and all things necessary or incident to the objects and purposes hereinabove set forth.
In his income tax return for the year 1926 the petitioner reported the sum of $29,300 as an ordinary dividend received from the Jefferson Distilling & Denaturing Co. This amount was arrived at by deducting from the total amounts received the sum of $6,400 representing the cost of the stock.
In his income tax return for the year 1927 the petitioner reported the sum of $4,680 as an ordinary dividend received from the Jefferson Distilling & Denaturing Co.
*991 In the notices of deficiency the respondent determined that the sum of $29,300 represented amounts distributed to the petitioner in liquidation of his stock in the Jefferson Distilling & Denaturing Co. during the year 1926, and that the sum of $4,680 represented amounts distributed to the petitioner in liquidation of his stock in the Jefferson Distilling & Denaturing Co. during the year 1927.
OPINION.
TRAMMELL: During 1926 the petitioner received from the Jefferson Distilling & Denaturing Co. two distributions in the aggregate amount of $35,700, from which amount he deducted the sum of $6,400 as representing the cost of his stock in that company, and reported in his return for the year 1926 the balance of $29,300 as an ordinary dividend, subject only to surtax.
During 1927 the petitioner received two additional distributions from the same company in the total amount of $4,680, which he reported in his return for the year 1927 as an ordinary dividend, subject only to surtax.
The respondent determined that the distributions, less the cost of petitioner's stock, constituted liquidating dividends, subject to tax at both normal and surtax rates. The correctness of the respondent's*992 determination in this particular is the only issue submitted for decision.
The petitioner contends that the transaction by which the Jefferson Co. transferred its assets on April 9, 1926, to the American Solvents & Chemical Corporation, in consideration of the payment by the American Corporation, of 12,166 shares of its preferred stock and cash in the sum of $1,445,520, constituted a reorganization within the purview of the taxing statute, and that the distributions by the Jefferson Co. of the cash so received, to the extent of its accumulated earnings and profits, constituted ordinary dividends.
*286 In the view we take of this case, it is immaterial whether or not the exchange transaction constituted a reorganization. If it were a reorganization, that fact alone would not make the distributions in question ordinary dividends. The petitioner contends that the distributions were ordinary dividends only to the extent of accumulated earnings and profits, and this might be so whether or not the transaction involved a reorganization.
The important question here, upon which the decision of the issue must turn, is whether the distributions were or were not a part of the*993 process of liquidating the Jefferson Co. At the time the distributions of April 12, 1926, November 9, 1926, and August 1, 1927, were made, the Jefferson Co. had accumulated book earnings and profits in excess of the sums distributed, and at the time of the distribution of $125,000 on October 31, 1927, the company had accumulated book earnings and profits of $46,358.50. The petitioner argues that, notwithstanding withstanding the fact that the accumulated earnings and profits were invested in the property transferred to the American Corporation, the distributions to the extent of the accumulated earnings and profits did not invade capital, and hence were not liquidating but ordinary dividends.
In ; affirming , the Circuit Court of Appeals for the Eighth Circuit disposed of the same argument there urged by the taxpayer, as follows:
The first heading is that the stipulated facts compel the conclusion that this was an ordinary dividend because the directors had and exercised the discretion (without fraud) to declare this dividend from surplus and profits without impairment of capital, and*994 because the dividend was so declared under compulsion of the Revenue Act of 1926 (Section 220) (26 USCA Par. 961 note) and Regulations 69, articles 353, 1545).
As to the first reason, two matters are destructive. The first is that the dividend was, as a matter of fact, not paid and could not have been paid from surplus and/or earnings. At the time this dividend was declared, the entire property of the corporation had been sold, under authorization of the stockholders, except the cash on hand and a claim for tax refund * * *
It is difficult to see how a part of the total price for all assets (which happen to include property bought with surplus and earnings) can be segregated and called "surplus" or "earnings". It is purchase price and nothing else. * * *
The facts on this point in the instant case are in all material respects the same as in the Tootle case.
The question presented here is governed by section 201(c) of the Revenue Act of 1926, which provides as follows:
(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall*995 be treated as in part or full payment in exchange for the stock. * * *
Whether *287 the distributions here in controversy represented amounts distributed in partial liquidation of the Jefferson Co., and must, therefore, be treated as in part or full payment in exchange for the stock, depends on the legal effect of what was actually done, and not upon the designation of the character of the dividends by the directors or their failure to apply the correct designation. It is also immaterial, we think, that no resolution was adopted by the stockholders authorizing dissolution of the corporation, nor that certificates for shares of stock were not surrendered for cancellation.
Upon the transfer of its assets to the American Corporation, the Jefferson Co. ceased to be a going concern, in the sense that it was no longer engaged in carrying on for profit the business for which it was organized. So far as the stipulated facts show, it thereafter devoted itself to the winding up of its affairs preparatory to final dissolution. It had contracted not to engage again in the alcohol business, and while it had also agreed not to dissolve or go into liquidation until the purchaser of*996 its assets had secured the necessary permits to operate the business, the purchaser was obligated to obtain such permits "with all proper expedition," and thereafter the Jefferson Co. was free to dissolve at any time.
Within three days after the transfer of its assets, the Jefferson Co. made a cash distribution of $590 per share, or in other words, declared a dividend of 590 percent on its outstanding common stock. In the absence of more facts than we have before us, we can not regard such dividend, paid under such circumstances, as an "ordinary dividend", which, as commonly understood, is defined to be "a recurrent return on stock paid to stockholders by a going corporation in the ordinary course of business." . This dividend undoubtedly was not a "recurrent return on stock" and was not paid by "a going corporation" nor "in the ordinary course of business."
In ; affirming , the court, in commenting upon a similar situation, said:
The company appears to have paid an 8 per cent. dividend, or $105,728. The amount of the federal taxes does*997 not appear. This was the "regular" dividend. Shortly after the extraordinarily large 50 per cent. dividend was paid out of the money received for the sale of the corporation. Certainly at the time of the payment of the dividend in question the corporation was not a going concern, in the legal sense, as its dissolution was already under way. It makes no difference what the directors called it when the dividend was declared, nor does the fact that subsequent dividends were termed "liquidating" dividends when this particular dividend was not so termed alter its character. The question of whether it was a "partial liquidating dividend" is to be determined, not from what it was called but by the facts as shown by the record. The record shows that it was a very unusual dividend, and entirely outside of the due course of the business of the corporation.
*288 The decision of the Commissioner and the Board that it was a "partial liquidating" dividend was clearly right, and petitioners were properly chargeable in their income tax with the amount of the dividend "as if they had sold their stock to third persons."
From the facts before us we can reach no other conclusion than*998 that the distributions in controversy were steps taken by the Jefferson Co. in the process of liquidation, and constituted liquidating dividends within section 201(c) of the 1926 Act, supra.
Reviewed by the Board.
Judgment will be entered for the respondent.