*2099 1. The liquidation of a subsidiary by the parent company during the taxable year is such a transaction in which a possible gain or loss should be recognized. Remington Rand, Inc., 33 Fed.(2d) 77, followed.
2. A certain dividend declared by the board of directors of the subsidiary on the day prior to the dissolution of the subsidiary held to have been "distributed in the liquidation of a corporation" within the meaning of section 201(c) of the Revenue Act of 1918.
*542 These proceedings which were consolidated are for the redetermination of deficiencies for the calendar year 1920, in the amounts of $76,211.05 and $164,676.98, respectively. Petitioners were affiliated for the year 1920 within the meaning of section 240 of the Revenue Act of 1918, and the taxes here in controversy were determined by the respondent and allocated to each petitioner on the basis of the net income assignable to each under that section. The principal issue is whether the parent company (Canal-Commercial Trust & *2100 Savings Bank) sustained a deductible loss of $675,438.31 upon the complete liquidation on December 31, 1920, of its subsidiary (Canal-Commercial National Bank). The respondent determined that due to petitioners being affiliated within the meaning of section 240, neither a gain nor a loss resulted from the liquidation. In an amended answer the respondent affirmatively alleges as a second and alternative defense, to be considered only in the event the Board should hold that the liquidation of the subsidiary constitutes a transaction in which gain or loss should be recognized, then, due in part to the subsidiary having declared and paid on December 30, 1920, a cash dividend of $1,000,000, the Board should find that the parent company realized a taxable gain upon the liquidation of its subsidiary of $324,561.69, instead of an alleged deductible loss therefrom of $675,438.31. Other errors alleged in the original and amended petitions are that the Canal-Commercial National Bank sustained the following alleged losses during the year 1920:
(1) Loss of $63,350.20 upon the sale of its assets to the parent company;
(2) Loss on claim against Crow-Rudolph Company in the amount of $20,458.32; *2101 and
(3) Loss on claim against the Southern Hardwood Manufacturing Company in the amount of $22,080.20.
In petitioners' brief the three latter issues are pressed only in case the Board should hold against the petitioners with respect to the principal issue.
FINDINGS OF FACT.
The Canal-Commercial National Bank, hereinafter referred to as the subsidiary, was organized as a corporation in the year 1900, *543 under the laws of the United States, with an authorized capital stock of $300,000, consisting of 3,000 shares of the par value of $100 each. On August 12, 1919, its authorized capital stock was increased from $300,000 to $500,000 par value, the increased capitalization being represented by an additional 2,000 shares. All of its authorized capital stock was outstanding at all times from June 1, 1914, to the time of its dissolution on December 31, 1920. The Canal-Commercial Trust & Savings Bank, hereinafter referred to as the parent company, was organized as a corporation in the year 1902, under the laws of the State of Louisiana.
Between June 1, 1914, and December 31, 1920, the parent company purchased all of the stock of the subsidiary at a total cost of $1,293,900, *2102 shown in detail as follows:
| Date purchased | Number of shares | Cost per share | Total cost |
| June 1, 1914 | 2,930 | $375 | $1,098,750 |
| Aug. 12, 1919 | 1,820 | 1 72.88+ | 132,650 |
| Dec. 31, 1920 | 250 | 250 | 62,500 |
| Total cost | 5,000 | 1,293,900 |
About a month before the purchase of the 2,930 shares a committee of the parent company reported to the parent company that after a full examination of the subsidiary the committee found a book value of the subsidiary's stock of "well in excess of $270.00 per share."
Consolidated Federal income tax returns were filed by the parent company and the subsidiary, for each of the years 1917, 1918, 1919, and 1920. The respondent has held that the two companies were affiliated for Federal tax purposes for each of the foregoing years.
On June 24, 1920, the board of directors of the subsidiary held a regular meeting, and among other things, the minutes of that meeting recited:
On motion of Mr. Parker, seconded by Mr. Kearny, a semi-annual dividend of $5.00 per share was declared payable onJuly 1st, 1920, to stockholders of record June 30, 1920.
On September 9, 1920, the board of directors of the subsidiary held*2103 a regular meeting, and among other things, voted to amend the seventh article of its articles of association to read as follows:
This Association shall continue until close of business on December 11, 1940, unless sooner placed in voluntary liquidation by the act of its shareholders owning at least two-thirds of its stock, or otherwise dissolved by authority of law.
*544 On December 21, 1920, the board of directors of the parent company held a regular meeting, and among other things, passed the following resolution:
The Chairman then called on Mr. J. P. Butler, Jr., Executive Vice President, to discuss the proposition of liquidation of the Canal-Commercial National Bank, and the taking over of that institution by the Canal-Commercial Trust and Savings Bank.
Mr. Butler stated that the proposition to liquidate the Canal-Commercial National Bank had been fully gone into by the officers of the Bank, and as the present location of the National Bank had been sold to the Federal Reserve Bank it would have necessitated removing the National Bank quarters to Camp and Gravier Streets, causing a great inconvenience to a large number of depositors, and it was the unanimous recommendation*2104 of the officers that the two institutions be merged as of December 31, 1920.
On motion of Mr. Clay, seconded by Mr. Ford, the following resolution was unanimously adopted:
RESOLVED, that this Board approves the proposition to liquidate the Canal-Commercial National Bank, and to take over its assets, and assume all of its liabilities, and hereby authorizes Mr. W. R. Irby, as Trustee, holding 4750 shares of stock of the Canal-Commercial National Bank, belonging to the Canal-Commercial Trust & Savings Bank, to sign a waiver of legal delays, and at a meeting of shareholders, to vote said stock in favor of liquidation, appointing a liquidator or liquidators, and authorizing the transfer of the assets of the Canal-Commercial National Bank to the Canal-Commercial Trust & Savings Bank, under such terms and conditions as, in his judgment, may seem fit and proper, and to take any and all other necessary and appropriate steps to consummate said consolidation.
On December 23, 1920, the board of directors of the subsidiary held a regular meeting and, among other things, declared a semiannual dividend of 10 per cent, payable on December 31, 1920.
On December 30, 1920, at 2.15 p.m., simultaneous*2105 meetings were held by the board of directors of the subsidiary and parent company, respectively. The meeting of the subsidiary was called a "regular" meeting, and the meeting of the parent company was called a "special" meeting. Twenty-three directors were present at the regular meeting and twenty-seven at the special meeting. Of the twenty-three present at the board meeting of the subsidiary, twelve were among the twenty-seven present at the meeting of the board of directors of the parent company. H. B. Caplan signed the minutes of both meetings as secretary. Among other things, the board of directors of the subsidiary voted to declare and pay a special dividend on that day of $1,000,000, which action was recorded in the minutes as follows:
On motion of Mr. A. D. Parker, duly seconded by Mr. Clay, a special dividend of $200.00 per share was declared payable on December 30, 1920.
*545 At the same time the board of directors of the parent company at the special meeting, among other things, passed the following resolution:
The Chairman stated the purpose of the special meeting was with reference to the liquidation of the Canal-Commercial National Bank and the election*2106 of certain new officers.
On motion of Mr. Clay, seconded by Mr. Parker, the following resolution was unanimously adopted:
IT IS RESOLVED, That this Bank do purchase from the liquidating agent of the Canal-Commercial National Bank of New Orleans, all of its assets consisting of its cash, its bills, notes and accounts receivable, whether from other banks or from customers, its bonds and treasury certificates, furniture and fixtures, good will, and all its property of every character, nature or kind whatsoever, whether real, personal or mixed, and all the rights and actions apertaining to and belonging to the said Canal-Commercial National Bank for the sum and price of Six hundred eighteen thousand, four hundred sixty one dollars and sixty nine cents ($618,461.69), it being understood that in this contract of purchase this Bank is to be fully subrogated to all the rights and actions of the said Canal-Commercial National Bank of every kind and character whatsoever; and as a further consideration of the said purchase of the said assets of the Canal-Commercial National Bank, this bank is to assume all the obligations, debts and liabilities of the said Canal-Commercial National Bank, *2107 whether of customers, depositiors or others, of every character whatsoever.
The resolution then proceeded to give W. R. Irby and J. P. Butler, Jr., authority to act in the matter, and then declared certain officers of the subsidiary as having been elected officers of the parent company.
On December 31, 1920, the board of directors of the subsidiary held a special meeting. The minutes of this meeting show that, among other things, the following occurred:
The Chairman stated the purpose of the meeting was to take such steps as were necessary in the final liquidation of the Bank.
The secretary read minutes of regular meeting held December 30, 1920. On motion of Mr. Hardie, Seconded by Mr. Kearny, the same were approved.
On motion of Mr. Downman, seconded by Mr. Curran, the following resolution was unanimously adopted:
RESOLVED, That it is the sense of this Board that the Canal-Commercial National Bank be placed in voluntary liquidation under the provisions of Sections 5220 and 5221 of the United States Revised Statutes to take effect December 31, 1920, and that William Messersmith be appointed liquidating agent of said Bank; * * *
IT IS FURTHER RESOLVED, That said*2108 William Messersmith do sell, transfer, set over and deliver to the Canal-Commercial Trust & Savings Bank of New Orleans all of its assets consisting of its cash, bills, notes, accounts receivable whether from other banks or from customers, bonds and treasury certificates, furniture and fixtures, good will, and property of every character, nature or kind whatsoever, whether real, personal or mixed and all the rights, and actions *546 appertaining and belonging to the Canal-Commercial National Bank with full subrogation to all its rights and actions and with full warranty for the sum and price of SIX HUNDRED EIGHTEEN THOUSAND FOUR HUNDRED SIXTY ONE DOLLARS AND SIXTY NINE CENTS ($618,461.69) and the assumption by the Canal-Commercial Trust & Savings Bank of all the debts and liabilities of the Canal-Commercial National Bank; said William Messersmith being hereby authorized to sign all necessary acts and deeds to carry this resolution into effect.
On December 31, 1920, at 2.30 p.m., the stockholders of the subsidiary held a meeting and ratified the action taken by the board of directors at the meeting held during the forenoon of the same day.
On December 31, 1920, an instrument*2109 entitled "SALE OF PROPERTY BY CANAL-COMMERCIAL NATIONAL BANK IN LIQUIDATION TO CANAL-COMMERCIAL TRUST & SAVINGS BANK" was executed and signed by the proper parties representing each of the banks in question. Pursuant to this instrument the parent company under date of December 31, 1920, issued a check to "William Messersmith, Liquidating Agent," of the subsidiary for $618,461.69, which check was deposited by Messersmith to his account with the Carondelet branch of the parent company, and thereafter, under date of December 31, 1920, Messersmith issued and delivered a check to the parent company for the same amount, to wit, $618,461.69, which check was treated as cash received by the parent company, and the latter thereafter and on December 31, 1920, delivered to Messersmith 5,000 shares of the capital stock of the subsidiary, which stock was, thereupon, marked "Cancelled."
The dividend of $25,000 declared by the board of directors of the subsidiary on June 24, 1920, was paid on July 1, 1920, and charged on the subsidiary's books of account against its "earned income" or its "undivided profits account." The dividend of $50,000 declared by the board of directors of the subsidiary on*2110 December 23, 1920, was charged on the subsidiary's books of account on December 30, 1920, against its "earned income" or its "undivided profits account," and checks were issued and dated December 31, 1920, and actually paid by the subsidiary on December 31, 1920, to the following persons, to wit: $47,500 to the parent company, and $100 each to twenty-five different individuals, who were stockholders and directors of the parent company.
The special dividend of $1,000,000 declared by the board of directors of the subsidiary at its regular meeting held at $2.15 p.m., on December 30, 1920, was charged on the subsidiary's books of account as follows, to wit: $900,000 to the "Surplus Fund Account" and $100,000 to the "Undivided Profits Account." On December 30, 1920, the subsidiary issued its check payable to the parent company in the amount of $1,000,000, which amount was entered in the books *547 and records of the parent company as cash received on December 30, 1920. The check for $1,000,000 was cleared through the New Orleans Clearing House Association on December 30, 1920, and actually paid by the subsidiary on December 31, 1920, in the usual course of the clearings.
*2111 The subsidiary transacted its business as a national bank from the time it was organized in 1900 until December 31, 1920, inclusive, in a building located at the corner of Carondelet and Common Streets, New Orleans, La., with its main and only entrance on Carondelet Street, which location was then, and is at the present time, the center of the financial district of New Orleans. On and after the close of business on December 31, 1920, and up to and including June 18, 1921, the parent company maintained a banking office or branch of its business in the building and in the same rooms previously used and occupied by the subsidiary.
The parent company took over the books and records of the subsidiary as at the close of business on December 31, 1920, and thereafter treated such books and records as its own property and used them as the books and records of one of its branch offices, which office was created on December 31, 1920. This branch office operated the business previously conducted by the subsidiary. The only entries made in the books and records of the subsidiary to record the transfer of the assets to the parent company, and the assumption by the latter of the liabilities*2112 of the former, were the entries necessary to eliminate from the books and records of the subsidiary the accounts of "Capital stock," "Surplus" and "Undivided profits" in the respective amounts of $500,000, $100,000, and $18,461.69, and to record in lieu of these amounts a surplus account of $618,461.69, which account represented the amount due by the branch office to the main office of the parent company. On December 31, 1920, the main office of the parent company charged in its general books $618,461.69, as due from its newly created branch referred to above. On June 18, 1921, the parent company moved its main office into a building located on the corner of Carondelet and Common Streets, which building was located on the opposite corner from the building previously occupied by the subsidiary. On and after June 18, 1921, the business of the branch of the parent company, which was created on December 31, 1920, was combined with the main office of the parent company.
The respondent determined the tax liability of each petitioner on the basis of a consolidated income and profits-tax return for the calendar year 1920, and refused to recognize, in his determination, either a gain*2113 or a loss resulting from the liquidation of the subsidiary and the surrender and cancellation of its stock.
*548 During the latter part of 1913 and the first two months of 1914, the subsidiary purchased thirteen drafts of the Southern Hardwood Manufacturing Company of Pensacola, Fla., drawn at ninety days sight on Crow-Rudolph Company of London, at a total cost of $70,460.88. The drafts were due at various dates ranging from January 1, 1914, to March 23, 1914. They were not paid at maturity, due to the failure to Crow-Rudolph Company. On February 10, 1914, the amount of $70,460.88 was charged into the past due bills account, and at least $25,418.78 of the amount so charged was subsequently collected. On June 30, 1914, the subsidiary charged off on its books as worthless, a claim against the Southern Hardwood Manufacturing Company in the amount of $25,000. On December 31, 1914, a like charge-off was made of the balance of a claim against the Crow-Rudolph Company in the amount of $25,000, and on June 30, 1915, the subsidiary charged off on its books as worthless the balance of a claim against the Southern Hardwood Manufacturing Company in the amount of $11,867.95.
*2114 During the year 1926 a revenue agent made an examination of the books and records of the subsidiary for the years 1911 to 1918. In the course of this examination the agent disallowed as deductions from gross income for the years 1914 and 1915, the above amounts totaling $61,867.95, which were charged off on June 30, 1914, December 31, 1914, and June 30, 1915, respectively. The respondent approved the agent's examination and the increased tax resulting from such disallowances was later paid by the subsidiary.
The respondent, in his determination of deficiencies for the year 1920, did not allow any deductions for losses on account of the above claims which the subsidiary charged off during 1914 and 1915, and which he restored to income for those years, during the year 1926.
OPINION.
LOVE: The principal question involved in these proceedings is whether the parent company realized a taxable gain or sustained a deductible loss upon the liquidation of its subsidiary during the calendar year 1920. Petitioners contend that the parent company sustained a deductible loss of $675,438.31 as representing the difference between the cost to the parent company of the subsidiary's stock, *2115 namely, $1,293,900, and the amount received by the parent company in final liquidation, namely, $618,461.69. The respondent determined that, since the two corporations were affiliated within the meaning of section 240 of the Revenue Act of 1918, neither gain nor loss resulted from the transaction in question. He still maintains that his determination in this respect was proper, but has pleaded in the alternative that in case the Board should hold the *549 liquidation of the subsidiary was such a transaction in which gain or loss should be recognized, then and in that event the Board should find that the dividend of $1,000,000, declared by the board of directors of the subsidiary on December 30, 1920, was a distribution in the liquidation of the subsidiary, and should therefore be added to the amount of $618,461.69 received in final liquidation for the purpose of determining the amount of the gain or loss resulting therefrom, and which, upon that basis, he contends resulted in a gain of $324,561.69 instead of a loss of $675,438.31 claimed by petitioners.
In *2116 ; certiorari denied, , the Circuit Court of Appeals for the Second Circuit held that where one corporation on March 1, 1916, purchased all of the stock of another corporation for a consideration of $45,000, and on February 28, 1920, sold such stock for $60,000, it realized a taxable profit of $15,000 on the sale, notwithstanding the two corporations were affiliated within the meaning of section 240, supra, and had filed consolidated returns for the years 1918, 1919, and the first two months of 1920. In the opinion the Court treated both the purchase and sale as taking place outside the period of affiliation. The language of the Court is:
Such a sale [of stock] terminates the affiliation which had resulted from its purchase. Both the purchase and the sale took place outside the period of affiliation, and were made by the seller for its own account, not for the account of the affiliation - as much so, we think, as if the parent company had purchased Blackacre before the affiliation began and had sold it after the affiliation.
*2117 In , and , we followed the Remington-Rand decision to the extent of recognizing that the disposition of stock by a member of an affiliated group which results in termination of the affiliation, may give rise to gain or loss. We think the same rule should be applied to the facts in the instant proceedings. See also the last sentence of section 201(c) of the Revenue Act of 1918, reading: "Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits" and .
We are thus confronted with the respondent's alternative contention, which presents the question whether the parent company sustained a deductible loss of $675,438.31 as contended by petitioners, or realized a taxable gain of $324,561.69, as contended by the respondent. The answer lies in whether the special dividend of $1,000,000 was an ordinary dividend as the petitioners contend, or *550 a distribution "in the*2118 liquidation of a corporation" within the meaning of section 201(c), supra.The respondent, in his alternative pleading, contends it was the latter. Petitioners in support of their contention on this issue rely principally upon the Board's decision in . The respondent argues that the instant case is more nearly like our decisions in , and . Both parties are agreed that the total cost of the 5,000 shares of the subsidiary's stock to the parent company was the amount of $1,293,900, and that the amount of $618,461.69, which the subsidiary transferred to the parent company on December 31, 1920, in exchange for the 5,000 shares of its own stock which were then canceled, was a distribution "in the liquidation of a corporation" within the meaning of section 201(c), supra. It only remains to determine whether the special dividend of $1,000,000 was also such a "distribution." We think it was. Section 5220 of the Revised Statutes requires only a vote of two-thirds of the stockholders of a national bank to place it in liquidation. On December 21, 1920, the*2119 parent company owned 95 per cent of the stock of the subsidiary. On that day the board of directors of the parent company met and voted "to liquidate the Canal-Commercial National Bank, and to take over its assets, and assume all of its liabilities." On December 30, 1920, at 2.15 p.m., simultaneous meetings were held by the board of directors of both companies with H. B. Caplan acting as secretary for each bank. Eleven other directors were present at both meetings. The action taken at these meetings is set forth in our findings. It was at this time that the special dividend of $1,000,000 was declared. Although the dividend was made payable on December 30, 1920, at which time the parent company owned but 95 per cent of the stock of the subsidiary (it acquired the remaining 5 per cent the next day), the subsidiary issued its check payable to the parent company in the full amount of $1,000,000, which amount the parent company entered upon its books and records as cash received on December 30, 1920, but it was not actually paid until the following day, December 31, on which day the stock was delivered and canceled. Under all the circumstances, we believe that the special dividend*2120 of $1,000,000 was "distributed in the liquidation of a corporation" within the meaning of section 201(c), supra.It follows that the parent company realized a taxable gain of $324,561.69 upon the liquidation of its subsidiary during the calendar year 1920. This transaction is one occuring outside of the group, and the gain realized is solely that of the parent company and not of the group and will not be reflected in the consolidated income of the two companies. Remington-Rand, Inc., and
*551 The evidence regarding the alleged losses sustained by the subsidiary on account of its claims against the Crow-Rudolph Company and the Southern Hardwood Manufacturing Company does not show that the subsidiary sustained any losses from those sources during the calendar year 1920, which is the only year before us. Neither is the evidence sufficient to show that the subsidiary sustained a loss of $63,450.20, or any other amount, on the sale of its net assets to the parent company, as alleged in the petitions.
Reviewed by the Board.
Judgment will be entered under Rule 50.
TRUSSELL and PHILLIPS, dissent.
Footnotes
1. Average. ↩