*1143 Held, under the circumstances of this case, the distribution by a corporation of certain shares of its own stock, pursuant to a resolution of the directors, amounted to a stock dividend, and the price paid for such stock by the corporation cannot be added to the cost of their stock holdings in determining the gain realized by the shareholders from a subsequent sale of the stock owned by them.
*331 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1928, as follows:
| Docket No. | Deficiency | |
| James Kay | 53450 | $9,464.29 |
| James Kay Trust | 53451 | 3,266.72 |
| William A. Ohley | 54467 | 2,051.86 |
The sole issue presented in all three dockets is whether the respondent erred in the basis used in determining the amount of taxable gain realized by the petitioners in 1928 from the sale of certain shares of the capital stock of the Cabin Creek Consolidated Coal Co.
The petitioner William A. Ohley waived assignmants of error contained*1144 in the petition filed in Docket No. 54467 relative to the inclusion in the gain determined by the respondent of the sale price of 69 shares of stock claimed to have been transferred by the petitioner to his adult daughter.
FINDINGS OF FACT.
James Kay is an individual, residing at Charleston, West Virginia.
The petitioner, James Kay, G. E. Thomas, and J. F. Kay, are trustees of an express trust created by James Kay on November 22, 1920, known as James Kay Trust, to which James Kay transferred and donated certain shares of corporate stock.
*332 William A. Ohley is an individual, residing at Charleston, West Virginia.
On November 29, 1913, W. M. Puckett, Azel Ford and James Kay agreed to purchase from one M. T. Davis and his associates 1,762 shares of stock of the Cabin Creek Consolidated Coal Co., hereinafter called the Cabin Creek, at $85 per share, or a total of $149,770, of which amount one fourth was paid in cash and the balance was evidenced by notes payable in one, two and three years from date. In order to raise the money for the cash payment the purchasers executed a note for $37,442.50 and discounted the same at the Kanawha Valley Bank. The shares of*1145 stock purchased had a par value of $100 each. The stock certificates held by M. T. Davis and his associates representing the 1,762 shares of stock were surrendered and new shares were issued to Puckett, Ford and Kay. The new certificates were endorsed and deposited as collateral security for the payment of the notes.
On December 10, 1913, the Cabin Creek executed its note in the sum of $37,442.50, which note was substituted for the note given by Puckett, Ford and Kay to secure the cash used in making the first payment for the above mentioned stock.
On April 24, 1914, the board of directors of the Cabin Creek passed a resolution authorizing the purchase by the corporation of the 1,762 shares of its stock which had been contracted for by Puckett, Ford and Kay. The corporation assumed and paid, as they came due, the several notes given to secure the payment of the balance of the purchase price of the stock.
No entry was made on the books of the corporation at the time it was resolved to take over the purchase of the stock and to assume the payment of the notes executed by the trustees. When payments on the notes were made by the corporation they were charged to "Stock Purchase*1146 Account." The last note became due and was paid in November 1916. The stock purchase account was closed to surplus in the amount of $149,770 under date of June 30, 1917.
On April 21, 1917, the board of directors of the Cabin Creek passed the following resolution:
On motion of Mr. Jackson, it was unanimously resolved that the 1762 shares of stock held by the Company in the name of Azel Ford, James Kay and W. M. Puckett, Trustees, be distributed among the stockholders in proportiov to their present holdings of common stock of the Company; that the certificates of stock be issued for full shares only, and a memorandum of fractions.
In accordance with this resolution, the certificates representing the 1,762 shares held in the name of Ford, Kay and Puckett were canceled and new certificates of stock were issued to all the stockholders of record in proportion to their holdings, with adjustments *333 for fractions of shares. No certificates for the 1,762 shares of stock were ever issued to the Cabin Creek. From April 24, 1914, upon which date the corporation assumed payment of the purchase price, until the notes were paid, the stock was held by the bank as collateral security*1147 for the payment of the purchase money.
During the period from April 24, 1914, to April 21, 1917, dividends were declared and paid by the Cabin Creek on all shares of its capital stock issued and outstanding, except the 1,762 shares purchased by the corporation under contract, as follows:
| Declared | Rate per share | Paid | Amount |
| Jan. 30, 1915 | $1.50 | Feb. 1, 1915 | $15,357 |
| May 15, 1915 | 1.50 | June 1, 1915 | 15,357 |
| Mar. 25, 1916 | 1.50 | Apr. 1, 1916 | 15,357 |
| June 30, 1916 | 1.50 | July 1, 1916 | 15,357 |
The surplus of the Cabin Creek at December 31, 1913, amounted to $322,233.18; the surplus at December 31, 1916, was $288,625.08. The corporation sustained a loss for 1916 in the amount of $101,233.07. For the years 1914, 1915, and 1917, the corporation's books show profits in the respective amounts of $85,277.98, $43,774.99 and $689,580.19.
In November 1913, before the sale by M. T. Davis and his associates of the 1,762 shares, petitioner James Kay owned 2,000 shares and petitioner William A. Ohley owned 537 shares out of a total of 12,000 shares issued and outstanding of the capital stock of the Cabin Creek. They continued to own the same number of shares*1148 during the period the 1,762 shares were held in the name of Azel Ford, James Kay and W. M. Puckett. Upon the distribution of the 1,762 shares pursuant to the resolution of the directors of the company dated April 21, 1917, James Kay received 344 shares and William A. Ohley received 92 shares, so that James Kay owned 2,344 shares and William A. Ohley owned 629 shares out of a total of 12,000 shares.
On November 22, 1920, James Kay transferred to G. E. Thomas, J. F. Kay and James Kay, trustees of James Kay Trust, one of the petitioners, 1,479 shares of the stock of the Cabin Creek, and on September 10, 1927, James Kay reacquired 832 shares from these trustees.
The basis of the 2,000 shares owned by petitioner James Kay was $238,944.38, and the basis of the 537 shares owned by petitioner William A. Ohley was $64,169.99.
In 1928 the petitioners sold their stock for $120.0551 per share.
*334 OPINION.
MATTHEWS: It is the position of the respondent that the 1,762 shares of stock which were purchased from M. T. Davis and his associates under the circumstances set out in our findings were distributed by the Cabin Creek Consolidated Coal Co. as a stock dividend, and that*1149 the shares received by the petitioners James Kay and William A. Ohley as a result of this distribution were acquired at no cost to them. The shares of stock held by the James Kay Trust were valued upon the same basis as they would have been if they had remained in the hands of the grantor, James Kay.
It is earnestly contended by the petitioners that in determining the taxable gain from the sale in 1928 of the stock owned by the petitioners the 344 shares distributed to James Kay and the 92 shares distributed to William A. Ohley should be valued upon the basis that they purchased the stock at a cost of $85 per share, which is the purchase price paid for the stock by the corporation. The petitioners urge that the 1,762 shares of stock were purchased by Ford, Kay and Puckett on behalf of the majority stockholders, that the corporation paid for this stock out of earnings or surplus, and that the payments made by the corporation were made on behalf of the stockholders and were the equivalent of cash dividends.
We have found that Ford, Kay and Puckett agreed to buy from the minority stockholders 1,762 shares of the stock of the Cabin Creek Consolidated Coal Co. at $85 per share, *1150 that the corporation took over the purchase and assumed the payment of the notes given to secure the purchase money and that the corporation did actually pay the entire amount of the purchase price. We can not agree with the petitioners' claim that this stock did not become the property of the corporation. It is admitted that the 1,762 shares were never transferred to the name of the corporation, but this is not conclusive that the corporation did not own the stock. The directors' resolution dated April 21, 1917, refers to "the 1,762 shares of stock held by the company in the name of Azel Ford, James Kay and W. M. Puckett, Trustees." No dividends were paid on these 1,762 shares in 1915 and 1916, during which years the corporation was making payments on the purchase price thereof. These payments were charged to "Stock Purchase Account" and the stock purchase account was closed to surplus under date of June 30, 1917, in the sum of $149,770, the full amount of the purchase price of the stock. There is nothing in the record to indicate that either the corporation or the stockholders treated these payments as cash dividends.
We hold that the 1,762 shares of stock were purchased*1151 by the corporation in 1914 for its own account and were distributed as a stock *335 dividend in 1917 among the remaining shareholders in proportion to their holdings. A corporation which has acquired its own stock may cancel the same, or hold it as treasury stock, or distribute it among the shareholders, without changing its financial situation. During the period the corporation owned the 1,762 shares and after their distribution to the shareholders each shareholder's proportionate interest in the total outstanding shares was exactly the same. The distribution added nothing to the interests of these shareholders; the additional shares so received were acquired by them without cost.
After a careful consideration of all the evidence adduced by the petitioners we have reached the conclusion that the petitioners have shown no greater basis for determining gain than was used by the respondent in asserting the deficiencies.
Judgment will be entered for the respondent.