*165 Decision will be entered for the respondent.
1. Petitioners received distributions in the amount of $ 3,802.50 in 1946, representing accumulated dividends on preferred stock pursuant to a "Plan of Recapitalization." Held, the $ 3,802.50 is taxable as ordinary income under section 115 (a), Internal Revenue Code, since the distributing corporation had sufficient earnings or profits.
2. The $ 3,802.50 was reported on an enclosure to petitioners' 1946 tax return as a return of capital and was not included as income. Held, for the purpose of determining whether petitioners omitted 25 per cent of the gross income to make the 5-year statute of limitations applicable under section 275 (c), this $ 3,802.50 constitutes omitted income. Estate of C. P. Hale, 121">1 T. C. 121, followed.
*319 The Commissioner has determined a deficiency in petitioners' income tax of $ 1,020.51 for the calendar year 1946, which is explained as follows:
1. $ 3,802.50-Dividends from American Woolen Company preferred stock. A taxpayer, on the cash basis of accounting, is required to report income for the taxable year in which received. You omitted this item from your dividend income reported on line 3, page 1, Form 1040, and referred to your enclosure # 4 in which you stated the payment was received and "not listed for income tax purposes." The available references in this office indicate the said cash dividend constituted a taxable dividend in the opinion of counsel*167 for the corporation itself and has therefore been added to your taxable income for 1946. The Statute of Limitations with respect to deficiency tax liability for 1946 is extended to five years because of the "omission" of this income and Section 275 (c), Internal Revenue Code, is quoted as follows.
* * * *
3. $ 468.83-Loss on wash sales of securities. Section 118, Internal Revenue Code, deals with losses from wash sales of stock or securities * * *
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It cannot be recognized that you were a dealer in securities during 1946 for this purpose since a dealer in securities has been defined as a merchant of securities with an established place of business regularly engaged in the purchase of securities and their re-sale to customers, that is one who as a merchant buys securities and sells them to customers, with a view to the gains and profits that may be derived therefrom. Taxpayers who buy and sell or hold securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, are not dealers in securities (Section 29.22 (c) (5), Regulations 111, Internal Revenue Code).
Petitioners contest the above adjustments*168 and assert that the 3-year statute of limitations is applicable and bars the deficiency. The other adjustments are not contested.
FINDINGS OF FACT.
The facts have been stipulated and are found accordingly.
Peyton G. and Anna M. Nevitt, petitioners herein, filed a joint Federal income tax return for the calendar year 1946 with the collector of internal revenue for the district of Maryland at Baltimore.
On December 31, 1945, the petitioners were the owners of 65 shares of 7 per cent cumulative preferred stock of the American Woolen Company, New York, New York. The American Woolen Company during the year 1946 effected a Plan of Recapitalization which provided for the voluntary exchange of the 7 per cent cumulative preferred stock for 1 1/2 shares of a newly created $ 4 cumulative convertible prior preference stock and $ 8.50 in cash, and the 7 per cent cumulative preferred stockholders who did not voluntarily participate *320 in the exchange would be paid the accumulated and unpaid dividends upon the 7 per cent cumulative preferred stock not so exchanged. The Plan of Recapitalization of the American Woolen Company sets forth exchange requirements as follows:
The Company is offering*169 for a limited period after the effective date of the Registration Statement, to holders of its outstanding shares of 7% (Cumulative) Preferred Stock (hereinafter sometimes referred to as the "Preferred Stock") pursuant to the Plan of Recapitalization dated April 30, 1946, the privilege of voluntarily exchanging such Preferred Stock, if and when the Plan shall be declared effective, for Prior Preference Stock and cash on the basis of 1 1/2 shares of Prior Preference Stock and $ 8.50 in cash for each share of Preferred Stock, including all rights to dividends accumulated and unpaid in respect of the Preferred Stock so exchanged. The Plan will become effective, if 80% or more of the outstanding Preferred Stock shall have been deposited for exchange by the close of business on October 2, 1946 or such later date as shall be specified in accordance with the Plan, and may become effective upon deposit of a lesser percentage in the discretion of the Board of Directors of the Company. If the Plan is consummated without the assent of the holders of all the Preferred Stock, the accumulated and unpaid dividends upon the Preferred Stock not so exchanged will be paid promptly in cash in full.
*170 * * * *
The earnings and profits of the American Woolen Company as of December 31, 1945, accumulated since January 1, 1941, amounted to $ 20,239,187.23, including a $ 9,000,000 reserve for war contingencies. The income of the American Woolen Company for the year ended December 31, 1946, amounted to $ 23,098,178.13, including a $ 3,000,000 provision for general contingencies. The combined sums of earnings and profits accumulated by the American Woolen Company as of December 31, 1945, and the income of the American Woolen Company as of the year ended December 31, 1946, amounted to $ 43,337,365.36, including a $ 3,000,000 provision for general contingencies. Total distributions of the American Woolen Company to all stockholders of all classes of stock during the year 1946 amounted to $ 23,602,665.66.
In a letter addressed to the preferred stockholders the American Woolen Company stated, under the heading of "Tax Considerations," the following:
It is the opinion of Counsel that on the other hand, under present laws, if and to the extent accrued dividends on the 7% Preferred stock are paid in cash, all of such dividends will constitute taxable income.
The petitioners did not exchange*171 their 7 per cent cumulative preferred stock for 1 1/2 shares of new $ 4 prior preference stock plus $ 8.50 in cash as was provided in said plan, but elected to receive payment in cash for accrued dividends on the 7 per cent cumulative preferred stock amounting to $ 58.50 per share. The petitioners received during the year 1946 a sum of $ 3,802.50 as a distribution on the 7 *321 per cent cumulative preferred stock of the American Woolen Company. The petitioners on their joint income tax return for 1946 reported the said sum of $ 3,802.50 as follows:
Payments received and not listed for income tax purposes -- 1946
1. Accumulated dividends on 65 shares American Woolen Co., preferred stock -- Distribution of Capital -- Immediately reinvested therein $ 3,802.50
Petitioners also received dividends from other sources in the amount of $ 689.55 which was reported as income in 1946. On their joint income tax return for 1946, the petitioners reported gross income in the total amount of $ 5,283.68, consisting of $ 4,590 received as a United States army officer, $ 689.55 dividends, and $ 4.13 interest.
OPINION.
Petitioners received the sum of $ 3,802.50 in 1946 from the American*172 Woolen Company which represented $ 58.50 for each of their 65 shares of 7 per cent cumulative preferred stock. The respondent determined that the $ 3,802.50 was payment to petitioners of accumulated dividends and was taxable as ordinary income. The petitioners contend that since the company effected a Plan of Recapitalization in 1946, the payment to them of the accumulated unpaid dividends on their 7 per cent cumulative preferred stock was made out of capital of the company and was not taxable. Petitioners did not participate in the exchange of their 7 per cent cumulative preferred stock but chose to retain their stock and collect the accumulated and unpaid dividends. Section 115 (a) defines a dividend as follows:
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) Definition of Dividend. -- The term "dividend" when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 26, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the*173 taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
Under section 115 (a) of the Code, when distributions are made from the earnings and profits of the distributing corporation accumulated after February 28, 1913, or from the current year's earnings or profits, they are classified as dividends and are fully taxable. Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737. The American Woolen Company as of December 31, 1945, had earnings and profits accumulated since January 1, 1941, amounting to $ 20,239,187.23. The earnings and profits of the company for the year ended December 31, 1946, amounted to $ 23,098,178.13. The total accumulated earnings and profits of the American Woolen Company as of December 31, 1946, amounted to $ 43,337,365.36 before diminution by any distributions made by the *322 company during the year 1946. The total amount of distributions made by the company to all stockholders of all classes of stock during the year 1946 amounted to $ 23,602,665.66. The sum of $ 3,802.50 received by the petitioners in 1946 from the American Woolen Company is a taxable dividend within the broad*174 scope of the definition of a dividend as defined by section 115 (a) of the Internal Revenue Code.
The Commissioner determined that since the petitioners did not include the sum of $ 3,802.50 received from the American Woolen Company during the taxable year 1946 in their gross income on their income tax return, the deficiency in the tax could be assessed and collected within 5 years from the date the return was filed as provided by section 275 (c) of the Code. The petitioners contend that the 5-year statute of limitations is not applicable as they reported the receipt of the $ 3,802.50 on an enclosure to their 1946 return. In reporting gross income on their 1946 income tax return, the petitioners reported $ 5,283.68, 25 per cent of which is $ 1,320.42. The amount of income omitted from gross income in dispute here is the $ 3,802.50 received from the American Woolen Company. The fact that the petitioners attached a schedule to their return stating that they had received this amount but that such amount was not taxable does not relieve them from the effect of having omitted this amount from their gross income. In Estate of C. P. Hale, 121">1 T. C. 121, *175 the receipt of a certain amount was omitted from gross income on the return and reported in a separate schedule attached to the return and defined as a capital receipt. The Court in holding that the 5-year statute of limitations under section 275 (c) was applicable said at page 124:
The amount was treated as a capital receipt. It was reported as such and not as income received. Failure to report it as income received was an omission resulting in an understatement of gross income in the return. The effect of such designation and failure to report as income was in substance the same as though the items had not been set forth in the return at all. * * *
See also Katharine C. Ketcham, 2 T. C. 159, affd. 142 F.2d 996">142 F. 2d 996. Therefore, since the petitioners omitted from gross income an amount in excess of 25 per cent of the gross income disclosed on their return, the income tax for the year 1946 is assessable and collectible within 5 years from the date the return was filed.
The respondent disallowed losses claimed on petitioners' tax return of $ 468.83 representing losses on wash sales of securities. Respondent contends that*176 no loss is allowable under section 23 (e) (2), Internal Revenue Code, and a deduction is allowable under 23 (f) only for dealers in securities, but petitioners are not dealers. Neither evidence nor argument was presented by petitioners who have the burden of proof and respondent's determination is therefore sustained.
Decision will be entered for the respondent.