*1164 1. Where stock is loaned in exchange for the promises of borrower (1) to pay the lender any dividends paid thereon during the loan, or the equivalent if the stock were sold, and (2) to return upon a date certain, or before, on notice, the same or an equal number of shares of the same stock, held, such dividends are legally includable in lender's income for the year in which paid to borrower, although not actually received by lender who is on a cash basis.
2. Held, further, sale of such stock by borrower results in no taxable gain to lender.
*88 The respondent has determined income tax deficiencies against petitioners for the period January 1 to April 17, 1928, in the sum of $3,934.23, and for the period April 18 to December 31, 1928, in the sum of $8,840.26.
In determining these deficiencies, respondent has included in the income of petitioners' decedent, and petitioners, certain dividends and profit on sales of stock during the periods mentioned, resulting in the contested deficiencies, both of which actions petitioners here*1165 assign as error.
FINDINGS OF FACT.
Petitioners are executors of the estate of Clara S. Peck, who died on April 17, 1928. On or prior to January 5, 1927, petitioners' decedent transferred to the Brooklyn Daily Times (hereinafter called Times), a newspaper corporation engaged in the publication of a newspaper in Brooklyn, New York, 8,800 shares of F. W. Woolworth Co. (hereinafter called Woolworth) stock, under the following agreement:
Brooklyn, N.Y., January 5, 1927.
The Brooklyn Daily Times hereby acknowledges the receipt from Mrs. Carson C. Peck, of eighty-eight hundred (8,800) shares of the stock of F. W. Woolworth Co., certificates Nos. WO-43112/19, incl., W-15844/48 incl., W/20981, and W-20968/69, incl., which have been loaned to it by her, for its accommodation, and to assist it in financing and conducting its business; to be used as colllateral, or sold, as may be needed for temporary requirements; and, for value received, hereby agrees to return such stock to Mrs. Carson C. Peck, or replace it with an equal number of shares, on or before January 1st, 1931, or at any previous date, upon thirty days written demand.
Any dividends declared on such stock, in the*1166 meantime to belong to her. In case the stock, or any part of it, is sold, the amount of the dividends that would have been received on such stock, if not sold, will be paid to her on January 1st, 1931, with interest from the date each such dividend would have been payable.
THE BROOKLYN DAILY TIMES
JOHN N. HARMAN,
Vice-President.
On or prior to January 2, 1928, 8,000 shares of stock of the same company were transferred under the following agreement:
BROOKLYN, N.Y., January 2, 1928.
The Brooklyn Daily Times, Inc. hereby, acknowledge receipt from Mrs. Carson C. Peck of eight thousand shares of the stock of the F. W. Woolworth Co. certificates numbered WO-43120/27, inclusive, which have been loaned to it by her for its accommodation and use in financing its business as may be needed for current requirements, and for value received, hereby agrees to return said stock to her, or if transferred, replace it with an equal number of shares on or before January 1st, 1933.
*89 It is further agreed that in case the stock or any part of it is transferred, the amount of the dividends that would have been received on said stock if not transferred, shall be paid to her*1167 on January 1st, 1933.
THE BROOKLYN DAILY TIMES, INC.
JOHN N. HARMAN,
Vice-President.
The Times was organized in 1910, and has been engaged since then in publishing a daily newspaper under that name in Brooklyn. This paper continued the publication of another daily newspaper which had been published under other names in the same place for approximately 63 years at that time. The entire stock of this present corporation, except qualifying shares, was owned by Clara S. Peck and Fremont C. Peck, the two children of Mrs. Clara S. Peck, who were also two of the three executors of petitioners' decedent. Fremont C. Peck, one of the petitioners herein, was secretary and treasurer of the Times during the year 1928.
The above mentioned transfers were made in order to assist the corporation in its financing, since it had suffered very substantial losses which had progressively increased during the preceding several years. The books of the corporation show such losses to have been as follows:
| 1923 | $418,646.51 |
| 1924 | 634,437.13 |
| 1925 | 886,468.61 |
| 1926 | 818,562.03 |
The following dividends were paid by Woolworth to the Times on the dates and in the amounts as*1168 follow:
| March 1, 1928 | $11,000.00 |
| June 1, 1928 | 20,375.00 |
| September 1, 1928 | 18,812.50 |
| December 1, 1928 | 17,375.00 |
| 67,562.50 |
On April 13, 1928, the Times sold 100 shares of the above mentioned Woolworth stock for $18,824. This stock had a cost basis to decedent of $17,485. Subsequent to the death of petitioners' decedent in 1928, 3,600 shares of the same stock were sold by the Times for $699,687.59. The cost basis of this stock was $187 per share.
After the transfer of the stock, pursuant to the agreements detailed above, the Times had new certificates of Woolworth stock issued in its name, and the old certificates were canceled by the transfer agent.
The respondent, in computing the income tax liability of petitioners' decedent, and also of her estate, for 1928, included the profit *90 on the sale of the Woolworth stock, together with the dividends paid thereon, as income, respectively, to her and her estate.
Petitioners' decedent filed her income tax returns on the cash receipts and disbursements basis.
OPINION.
LEECH: The propriety of including the dividends and a part of the proceeds of the sale of the Woolworth stock, as gain thereon, *1169 in the income of petitioners' decedent, and petitioners, for 1928, rests upon the relationship between petitioners' decedent and the Times, existing, by virtue of the written agreements appearing in the findings of fact, at the receipt of these funds by the Times. Although these two agreements are not identically worded, we have no hesitation in concluding, as apparently the parties here concluded, that their meaning and intent was the same.
Whether the transfer of the Woolworth stock was a loan, as respondent contends, or a sale, which petitioners urge, petitioners' decedent, Clara S. Peck, legally could, and actually did, by the recited agreements, reserve to herself the right to the dividends paid thereon. .
Although the contested dividends were undoubtedly received by the Times, they were "derived" - which is the word used in the applicable statute 1 - by decedent and petitioners. Cf. ; .
*1170 The Times received these dividends, either as agent for Mrs. Peck, or the petitioners, in their collection, or as trustee for the same purpose. Cf. If the former construction is accepted, petitioners' decedent, Mrs. Peck, and petitioners, are clearly liable as the taxpayers deriving the income therefrom, even though neither she nor petitioners actually received it from the Times. The receipt of income by an agent for that purpose is receipt by the principal. ; ; .
If the status of the Times be construed as that of a trustee, then these dividends, immediately upon their receipt, became distributable under the terms of the express trust within which they were collected, and were thus taxable to the distributees thereunder, though never actually distributed. Revenue Act of 1926, section 219(b)(2). Cf. Accordingly, petitioners' *91 assignment of error in reference to respondent's inclusion of the*1171 dividends in computing the contested deficiencies, is overruled.
But this controlling relationship between the Times and petitioners' decedent, in its effect here upon any profits on, or proceeds from, the sale of the Woolworth stock by the Times, was different from that relating to the dividends.
Certainly, if the controverted transfer of the stock to the Times were a sale, no income could have been derived by petitioners' decedent, or petitioners, in its later sale by the Times. Though not a sale, the same result follows upon the present record.
The purpose of the transfer to the Times was merely to relieve its financial difficulties, in accomplishing which, Mrs. Peck was obviously deeply interested. In effectuating this purpose by the transfer of the Woolworth stock under the terms of these agreements, no idea of securing pecuniary profit to her is apparent. No agency or trust was created under which this stock was to be sold for petitioners' decedent, or petitioners. She intended to and did provide for the return to her of an equal number of shares of the same stock borrowed and the payment to her of any dividends paid thereon in the meantime, or, in the event*1172 of the sale of the stock, the equivalent thereof. However, no obligation upon the Times to account to petitioners' decedent, or petitioners, for any part of the proceeds of their sale of this stock, directly or indirectly, resulted from these agreements, or otherwise.
Under the terms of the recited agreements, decedent loaned this stock, not money, as in the case of In exchange for the promises of the Times contained in these agreements, petitioners' decedent transferred the stock, together with all incidents of ownership therein, except the right to enjoy the dividends thereon. These incidents of ownership, so transferred, included the right to sell or hypothecate the stock for its own account. The Times exercised this right. No gain was derived by petitioners' decedent, or petitioners, in such sale. ; . The assignment of error directed to the inclusion of such gain in the computation of the disputed deficiencies, is sustained.
Decision will be entered under Rule 50.
Footnotes
1. Sec. 213(a), Revenue Act 1926. The term "gross income" includes gains, profits, and income derived * * *. ↩