*2444 In the circumstances of these cases, where the stock of one corporation was acquired and issued in the names of the stockholders of another corporation and distributed to them in proportion to their holdings of stock in the latter, held, such distributions are taxable dividends to said stockholders.
*253 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income-tax liability for the years and in the deficiencies indicated below:
| Henry L. Erlewine: | |
| 1923 deficiency tax | $385.76 |
| 1925 deficiency tax | 47.25 |
| Total | 433.01 |
| Albert H. Loucks and wife: | |
| 1923 deficiency tax | 33.38 |
| 1924 deficiency tax | 8.27 |
| 1925 deficiency tax | 7.32 |
| Total | 48.97 |
| Estate of C. C. Chamberlin, Ama Chamberlin, | |
| administratrix: 1923 deficiency tax | 3,436.41 |
| Margaret Egan: 1923 deficiency tax | 27.59 |
The issue is the same in each of the cases and is: Did the petitioners, the stockholders of the Marion Machine Foundry & Supply Co. of Indiana, receive in 1923 a taxable dividend, represented*2445 by the capital stock of the Marion Machine Foundry & Supply Co. of California, which was issued and distributed in the manner hereinafter indicated?
The cases are submitted on the allegations made in the petitions and admitted in the answers and on certain stipulations and exhibits filed.
FINDINGS OF FACT.
Petitioners in Docket Nos. 33442 and 33501 are residents of Marion, Ind., and the petitioners in Docket Nos. 37011 and 37012 are residents of Washington, Pa.
*254 All the petitioners were stockholders of the Marion Machine Foundry & Supply Co., a corporation of Marion, Ind., which conducted a business of manufacture and sale of oil-well drilling machines and supplies, the distribution of which was made through various branches established throughout the country.
One C. Sharon of Long Beach, Calif., was in 1922 engaged in selling the machinery and supplies manufactured by the Indiana company and was then indebted to said company to the amount of $50,000, which he desired to pay by incorporating his said business, as the Marion Machine Foundry & Supply Co. of California, with a capital stock of $50,000 and the transfer of the same to or for the benefit of the*2446 Indiana company.
In pursuance of such purpose his business was so incorporated and on November 25, 1922, the Indiana company, at a stockholders' meeting, passed the following resolution, which was also adopted December 12, 1922, at a directors' meeting, to wit:
Whereas this Corporation can not, under the law hold stock in a corporation;
Therefore, BE IT RESOLVED by the corporation that the stock of the California corporation shall be accepted by the stockholders of this Corporation in payment of the said sum of Fifty Thousand ($50,000.00) Dollars owing by said Sharon, and that Henry L. Erlewine be and he is hereby named as Trustee for the stockholders of this corporation to hold in trust the said stock of said California corporation, in trust, nevertheless, and for the use and benefit of the stockholders of this Corporation, said stock to be issued to the stockholders of this Corporation in proportion to their present holdings herein and assigned and transferred to the said Henry L. Erlewine, Trustee, and that such a trust agreement be prepared and entered into by and between the said Erlewine as Trustee and the respective stockholders of this corporation.
On January 6, 1923, an*2447 agreement concerning the capital stock of the Marion Machine Foundry & Supply Co. of California was entered into between all the stockholders of the Marion Machine Foundry & Supply Co. of Marion, Ind., which agreement among other things recited and provided in substance, as follows: That the California company was indebted to the Indiana company in the amount of approximately $50,000 for merchandise and was willing to deliver its entire capital stock to Henry L. Erlewine as trustee for the use and benefit of the Indiana company, which (so recited) is not able to own or hold such capital stock and that it is to the best interests of the Indiana company to operate and control the business of the California corporation in conjunction with its own business and as part thereof.
In said agreement it was further recited that it would be for the best interests of both corporations that the stock of the California corporation be held by said "Henry L. Erlewine in trust, nevertheless, for the use and benefit of the stockholders of said Marion *255 Machine Foundry & Supply Co. of Marion, Ind., in accordance and harmony with their present pro rata holdings of stock therein."
The agreement*2448 then sets out the number of shares of stock in the Indiana corporation and the par value of the same, held by each stockholder, and the number of shares of stock of the California corporation each stockholder of the Indiana corporation would be entitled to upon distribution of the stock of the California corporation among them.
The agreement recites that there are 5,000 shares of stock of the California corporation of the par value of $10 each and then provides:
THEREFORE, it is agreed by and between all of the parties hereto that said California Corporation or the officers thereof, upon being duly authorized so to do by the laws of the State of California, shall issue, execute and deliver to and in the name of Henry L. Erlewine, trustee, the entire capital stock of said California Corporation, excepting three (3) shares thereof sufficient to comply with the laws of the State of California, for the operation of said Corporation in said State, for the use and benefit of the said Marion Machine Foundry & Supply Company and its stockholders and the said California Corporation's business shall be continued, operated and managed by the officers of the Marion Machine Foundry & Supply*2449 Company as a part of and in connection with its present business. The said certificates of stock shall be issued separately as to the proportionate share of the present stockholders of said Marion Machine Foundry & Supply Company; and said Trustee shall vote said stock at all meetings of said California Corporation and all dividends declared thereon shall either be paid to said Marion Machine Foundry & Supply Company and accounted for in the management of its business or shall be by said Trustee paid to the undersigned stockholders and each of them in proportion to their present holdings in the said Marion Company as said Trustee shall determine to be for the best interests of the parties and each of them hereto, it being understood that said Trustee herein assumes no liability of any kind or character with respect to the holding of the title to said shares of stock in trust and is to be at no personal expense of any kind or character, either in his individual or trust capacity.
It is also provided in the agreement that in the event of the death of any stockholder of the Indiana corporation or his desire to dispose of his stock, the remaining stockholders and each of them shall*2450 have the first right and option to purchase such stockholder's holdings in both corporations before the same are sold to any other person, etc.
It was also agreed that upon the issue and delivery of the certificates of stock of the California corporation in trust to Henry L. Erlewine he would have the right and authority to comply with all California laws pertaining to holding, transferring, etc., said stock and was also "authorized and directed to use, own, control, handle and dispose of said stock as in his judgment as such Trustee shall be for the benefit of the undersigned stockholders of and the said Marion Machine Foundry & Supply Company, of Marion, Indiana."
*256 The heirs, executors, administrators, assigns, and representatives of the parties to the agreement were to be bound thereby.
The same parties, on March 29, 1923, executed an interpretative agreement to become a part of the contract of January 6, 1923, providing that the January contract should "not be construed to inhibit any of the present stockholders in said corporation and any of the signers to said agreement from in anywise selling and disposing of their respective interests or shares of stock to*2451 any one or more of the undersigned upon such terms and conditions as they may agree upon;" that the original provision was "intended to apply only to the sale of said stock to others than the subscribers thereto."
The journal entries on the books of the Indiana corporation show that Erlewine, trustee of the California corporation, was charged with $50,000 and that the account receivable, known as "California Current," was eliminated from the books by a credit of $50,000.
The books of the Indiana corporation further show that the 5,000 shares of the capital stock of the California corporation were "held in trust" by Henry L. Erlewine for the stockholders of the Indiana corporation, in accordance with their pro rata holdings of the Indiana corporation stock, the California corporation stock being issued directly in the names of the beneficiaries.
The earnings of the California corporation were each year transferred to the surplus of the Indiana corporation.
OPINION.
SEAWELL: It is contended on behalf of the petitioners that the Marion Machine Foundry & Supply Co. of Marion, Ind., was in 1923 the true owner of the stock of the California corporation and that the Commissioner*2452 erred in asserting deficiencies against petitioners as the owners of the same, as a taxable dividend.
The issue must be determined in the light of the evidence of what was actually done relative to the stock of the California company, which action was based on the assumption that the Indiana company, a corporation, could not own or hold the stock of the California company, another corporation.
The only formal action taken by the Indiana company, as a corporation, was the passage of the resolution on November 25, 1922, by its stockholders, and adopted by its directors on December 12, 1922, providing that the stock of the California corporation should be accepted by the stockholders of the Indiana corporation in payment of the sum of $50,000 owing it by one Sharon, and that Henry L. Erlewine be named as trustee for the stockholders of the Indiana corporation to hold in trust the stock of the California corporation for the use and benefit of the stockholders of the *257 Indiana corporation, such stock to be issued to the stockholders of the Indiana corporation in proportion to their then holdings therein and assigned and transferred to said Erlewine, trustee, and that such*2453 a trust agreement be prepared and entered into by and between said Erlewine as trustee and the respective stockholders of the Indiana corporation.
Agreements of the kind indicated and in part literally set forth in our findings of fact were executed by the stockholders of the Indiana corporation, including the petitioners and C. Sharon, the organizer of the California corporation.
The names of neither of the corporations, the Indiana nor the California, are signed to either of the agreements of January 6, 1923, or March 29, 1923, such agreements, however, being signed by all the stockholders of the Indiana corporation, who thus contracted with one another to have the stock of the California corporation, to which they were entitled, controlled by one of their number, Henry L. Erlewine, as trustee.
In order that no misunderstanding might arise about the rights of the individual stockholders relative to the stock of the California corporation, the agreement of March 29, 1923, was executed, wherein it is made plain that the stockholders individually rather than the Indiana corporation had the right of disposition of the stock of the California corporation issued and standing in*2454 their names.
The evidence does not, it is true, indicate that the Indiana corporation formally declared a dividend. It does appear, however, that the assets of such corporation to the amount of $50,000 were appropriated for the purpose of paying in or acquiring the capital stock of the California corporation and that each of the stockholders was credited with his proportionate share of such stock.
No formal dividend declaration was necessary to constitute a distribution as a taxable dividend. ; .
The Commissioner's determination is presumed to be correct and as the petitioners raised no question as to available earnings of the Indiana corporation being sufficient that a dividend of $50,000 could have been declared and as there is no evidence to the contrary adduced, it may be presumed that the accumulated earnings were, in fact, sufficient to cover the distribution of the California corporation stock among the Indiana corporation stockholders, as indicated in aforesaid agreements and as shown by the journal entries on the books of the Indiana corporation, where the*2455 number of shares of the California corporation standing in the name of each stockholder of the Indiana corporation is set out.
*258 The fact that the trust agreement of January 6, 1923, recognizes the Indiana corporation as an interested party in the California corporation and might receive benefits therefrom is not controlling as to actual ownership of the stock of the latter, in the light of the facts and circumstances of the cases.
The Indiana and California corporations were separate and distinct entities, organized at different times, in different States and governed by different laws.
The acquisition of the stock of the latter by the former or by the stockholders of the former (whichever view may be taken) did not constitute such stock Indiana corporation stock, of the kind and character of its own capital stock, but was merely so much property, in the form of stock in another corporation and a distribution of such stock among stockholders in proportion to their holdings in the Indiana corporation, as the evidence shows was done in the instant cases, was in our opinion, in fact or in effect, in the nature of an informal property dividend or distribution*2456 of the stock of another corporation among stockholders of the Indiana corporation and as such is a taxable distribution or dividend and not a stock dividend, in the sense in which that phrase is used in the statute.
The resolution passed by the stockholders on November 25, 1922, and the journal entries on the books of the Indiana corporation indicate that the California corporation stock was of par value and was so accepted, and there being no evidence introduced to establish that the fair market value of the same was ever any less, we are of the opinion that the Commissioner committed no error and accordingly approve his determination in the instant cases.
Reviewed by the Board.
Judgment will be entered for the respondent.