*3583 Company A owned all the capital stock of Company B, for which it had exchanged all its assets and 55 per cent of its common stock. It had transacted practically no business for 10 years other than to receive dividends on Company B stock, pay out the money so received to its own stockholders and attend to its duties as stockholder. In 1919 Company B reorganized, reduced its capital stock one-half, and issued 4,244 of the authorized issue of 5,000 shares pro rata to the stockholders of Company A, other than itself, and left 756 shares unissued. Company A was immediately dissolved and paid nothing to its stockholders. Held, that Company B suffered no deductible loss under section 234 of the Revenue Act of 1918.
*153 This proceeding results from the determination by respondent of a deficiency of $7,514.86 in petitioner's income and profits taxes for the year 1919. The deficiency arises from the refusal of the respondent to allow a deduction of $74,400 claimed by the petitioner as a loss sustained*3584 by it on 4,400 shares of stock of the Walworth & Neville Manufacturing Co., purchased and paid for by petitioner in 1908, and which had become worthless within the year 1919.
FINDINGS OF FACT.
The petitioner, hereinafter referred to as the lumber company, was incorporated in 1908 under the laws of the State of Washington, with authorized capital stock of $1,000,000, divided into 10,000 shares of the par value of $100 each. In the same year it acquired from the Walworth & Neville Manufacturing Co., a Michigan corporation, hereinafter referred to as the manufacturing company, certain timber lands, cut-over lands, sawmill, cross-arm factory, machinery and equipment, and 4,400 shares of the stock of the manufacturing company, and issued therefor its entire authorized capital stock to persons not disclosed by the record. The value of this property at date of its acquisition by the petitioner was $1,170,000.
The 4,400 shares of stock acquired from the manufacturing company as above set forth and owned by the petitioner at March 1, 1913, had a fair market value of $225,967.28 on that date. In the taxable year the manufacturing company owned 5,541 shares of the stock of the petitioner.
*3585 In 1919 the petitioner reduced its capital stock without consideration to 2,500 shares of common stock and 2,500 shares of preferred stock, all of the par value of $100, each. This procedure reduced the 5,541 shares of the petitioner's stock then owned by the manufacturing company to 1,385 1/4 shares of common and 1,385 1/4 shares of preferred. In the distribution of its reduced stock, the petitioner issued 1,385 1/4 shares of preferred to certain owners of the preferred stock of the manufacturing company, 629 1/4 shares of common to other stockholders of such company, 1,114 3/4 shares of preferred and 1,114 3/4 shares of common to its other shareholders and retained unissued 756 shares of common.
Upon the completion of the reorganization of the petitioner the manufacturing company had no assets, except its interest in the stock of the petitioner, and was dissolved with its outstanding stock of the par value of $440,000 owned by the lumber company. It was *154 also in debt to its own preferred stockholders in amounts not disclosed by the record.
In its income and profits-tax return for the year 1919 the petitioner estimated the value at March 1, 1913, of its 4,400*3586 shares of the stock of the manufacturing company at $150,000, and deducted as a loss sustained in the taxable year the difference between such value and the par value of its 756 shares of unissued stock in the amount of $74,400. The respondent disallowed the deduction so claimed and determined the deficiency here in controversy. The parties agree that the stock of the manufacturing company owned by the petitioner had a fair market value of $225,967.28 at March 1, 1913, and that the unissued stock of the petitioner in the taxable year had a fair market value of $107,197.53, and that the manufacturing company owned 5,541 shares of the common stock of the petitioner just prior to the reorganization thereof.
The stock of the manufacturing company consisted of 8,000 shares of common and 1,000 shares of preferred. At the date of the reorganization and the transactions involved in this proceeding, the petitioner owned 44/80 of the common stock of the manufacturing company and the manufacturing company owned 55.41 per cent of the stock of the petitioner.
OPINION.
LANSDON: At the hearing before the Board counsel for petitioner said:
The Walworth Manufacturing Company was dissolved*3587 in the year 1919. At the date of its dissolution that corporation owned certain shares of stock in the Walville Lumber Company which may be accepted, and I believe it is admitted as being its only asset at or immediately prior to the dissolution. The reduced shares of stock of the petitioner which were issuable to the Walworth & Neville Manufacturing Company as one of its stockholders were never, in fact, issued to that company. Instead, its proportion of the preferred stock and 629 1/4 shares of the common stock were issued directly to the stockholders of the Walworth & Neville Manufacturing Company, other than the petitioner, 756 shares which might in the ordinary course have been issued to the Walworth & Neville Manufacturing Company never having been issued.
This statement, while it may not be considered as evidence, is clearly an admission that the petitioner instead of issuing its shares of diminished stock to the manufacturing company, in proportion to the stockholdings thereof, actually issued them to certain of the stockholders of that company. The admission is in line with and tends to confirm the conclusion naturally deducible from the facts in evidence, that the*3588 stockholders of the two companies, including, necessarily, the companies themselves, decided to and did take a short cut across lots to accomplish the result they had in mind; that they in effect restored to the lumber company title to all its capital *155 stock on condition that the number of shares he decreased one-half, as they were decreased, and be issued, as they were issued, to certain of the stockholders of the manufacturing company. As a part of the final result, the 4,400 shares of the stock of the defunct manufacturing company became worthless in the hands of the petitioner which as a set-off to this loss retained 756 shares of its new stock unissued. There was evidently an agreement among the two companies and their stockholders to consider that all customary legal steps had been accomplished by the results attained.
So far as we have been able to ascertain, petitioner has received no compensation for its manufacturing company stock, except the 756 shares of its own stock remaining unissued. Considering the transaction as a whole, we have here seemingly a gain to the lumber company of 756 shares of its own authorized second issue as against a loss of the 4,400*3589 shares of the manufacturing company's stock, a net gain or loss of the difference between these two. Substituting admitted values for shares, we have $225,967.28 loss, minus $107,197.53, which equals $118,769.75, the loss which the petitioner now alleges that it sustained in the taxable year.
These transactions could not have taken place without the lumber company's assistance; certainly not without its acquiescence. It held 4,400 of the 8,000 shares of the common stock of the manufacturing company. That is to say, its shares constituted 44/80 of the common stock and 44/90 of all the stock, and therefore, as stated in its tax return for 1919, it "held a controlling interest in the stock" of that company. It must, therefore, have decided to do the things which were done.
After reorganization the petitioner's stock consisted of 2,500 shares of preferred and 2,500 shares of common, of which 1,385 1/4 shares of preferred and an equal number of shares of common should have been issued to the manufacturing company, which was the owner of 55.41 per cent of the petitioner's original 10,000 shares of issued capital stock. If, after such issue, the manufacturing company had distributed*3590 the stock so received as a liquidating dividend, the petitioner, as the owner of 4,400 of the 9,000 outstanding shares of stock of the manufacturing company, would have received back 1,354 1/4 shares of its own stock, and other owners of the stock of the manufacturing company would have received the remainder, or 1,416 shares. Probably on account of its obligations to its preferred stockholders the manufacturing company distributed, or consented to distribution directly to its stockholders, 1,385 1/4 shares of the preferred and 629 1/4 shares of the common stock, which were due it from the petitioner after reorganization. The effect of this procedure was that the petitioner received no part of the 1,354 shares of its stock due as a liquidating dividend from the manufacturing company and received no *156 advantage therefrom measurable in stock other than the retention of 756 shares of its new common stock unissued.
Since each of the two companies here involved owned a controlling interest in the common stock of the other when the procedure above described was decided upon, we may assume that all the steps taken were the acts of the two corporations with the knowledge and*3591 consent of the stockholders of each. Obviously the petitioner must have agreed to relinquish a part of the liquidating dividend due it upon the dissolution of the manufacturing company in favor of the preferred stockholders of that concern. Whether the extra stock received by such preferred stockholders was a gift to them, a liquidating dividend from the manufacturing company, or a stock dividend distributed by the petitioner, can not be determined from the meager record before us and in our opinion is not material. In any event, the petitioner has proved no loss deductible from its income in the taxable year for tax purposes.
Reviewed by the Board.
Judgment will be entered for the respondent.