*1452 A dividend declared by petitioner corporation, payable in stock of another corporation and so paid, did not give rise to taxable gain.
*934 The respondent has determined a deficiency in income tax in the amount of $128,342.07 for the calendar year 1928. The only question presented in this proceeding for redetermination is whether petitioner realized taxable gain in declaring a dividend and paying it in the stock of another company at an agreed value per share, which value was in excess of the cost of the stock to petitioner.
FINDINGS OF FACT.
1. The petitioner is a Delaware corporation, with its principal offices at Baltimore, Maryland. It is engaged in the business of owning securities of, managing, and operating public utility properties.
2. On January 1, 1927, the petitioner acquired 20,000 shares of no par value of the common capital stock of another corporation, the Islands Edison Co. Said 20,000 shares of stock constituted one half of the*1453 total common capital stock of the Islands Edison Co. outstanding; *935 the remaining 20,000 shares were owned by Gillet & Co., which company is not connected with petitioner nor with petitioner's stockholders. Petitioner acquired the 20,000 shares of common capital stock of the Islands Edison Co. at a cost to it of $2,000 and set up such stock on its books at a total value of $2,000.
3. During the month of January 1928 Walter Whetstone, president of the Southern Cities Utilities Co., became interested in acquiring control of a Santo Domingo company, the stock of which was owned by the Islands Edison Co. Upon inquiring of Gillet & Co. he ascertained that the entire common stock outstanding of the Islands Edison Co. was owned equally, as aforesaid, by Gillet & Co. and petitioner. During a conference with J. C. M. Lucas, president of petitioner, Whetstone discussed the purchase of the Santo Domingo company or the Islands Edison Co. common stock and as a result thereof was given permission to make an investigation of the properties of the Santo Domingo company. Sometime in February of 1928 Whetstone informed Gillet and Lucas that his plans required the delivery of all the*1454 common stock of the Islands Edison Co., that he was informed by Gillet that his firm was ready and willing to make the sale of the 20,000 shares owned by Gillet & Co. of the Islands Edison Co. common stock, and that he (Gillet) and Lucas, president of petitioner, had agreed upon the price at which the sale would be made. Whetstone was informed by Lucas that if a sale of the 20,000 shares of the common stock of the Islands Edison Co. then owned by the petitioner were consummated, such a sale would be made only after petitioner had distributed the Islands Edison Co. shares to its stockholders; because they had been advised by their attorneys that if sale were made by petitioner it would be subject to a tax on any profit realized on the sale and that when the proceeds of the sale were distributed to the stockholders, the stockholders would have to pay another tax thereon. The price to be paid for the properties and the terms and conditions of the sale generally were agreed upon by Gillet, Lucas, and Whetstone, but no contract was entered into by them, it being understood and agreed between them that petitioner would make distribution of the stock of the Islands Edison Co. to its stockholders*1455 and that counsel would prepare a written agreement embodying the terms and conditions of the sale, the agreement to be submitted for approval to the stockholders of the Islands Edison Co. after the distribution of said stock by the petitioner. Lucas never held power of attorney to sell the stock for the petitioner or its stockholders.
4. At a meeting of petitioner's directors on March 22, 1928, the matter of petitioner's stockholdings in the Islands Edison Co. was discussed and it was reported as the opinion of petitioner's officers that the stock was worth at least $1,122,500 and that it should be *936 appreciated on petitioner's books to that figure. Further matters discussed and action taken at that meeting are recorded in the minutes as follows:
The Chairman also suggested to the meeting that the Company considered declaring a dividend on the Common Stock of the Company in the amount of $1,071,426.25, payable out of the appreciation so set up, the dividends to be paid in Common Stock of the Islands Edison Company at a value of $56.12 1/2 a share.
Whereupon the following resolutions were unanimously passed, viz:
(a) that this Company appreciate on its books, *1456 its holdings of Common Stock of The Islands Edison Company in the amount of 20,000 shares in the amount of $1,120,500.00 and that the amount of this appreciation be credited to surplus arising from appreciation of assets;
(b) that a dividend in the amount of $1,071,426.25 be and it is hereby declared on the Common Stock of this Company payable in Common Stock of The Islands Edison Company at a valuation of $56.12 1/2 a share, out of the surplus of the Company arising from the appreciation in the value of the Common Stock of The Islands Edison Company held by this Company, viz, $1,120,500.00, the payment of the dividend to be made by the delivery to the stockholders of this Company pro rata, a certificates for the Common Stock of The Islands Edison Company held by this Company at the rate of two shares of such stock for each share of Company Stock of this Corporation; the stockholders entitled to be those of record at the close of business this day.
There being no further business before the meeting, it then adjourned.
5. The petitioner thereupon, on March 22, 1928, simultaneously entered on its books of account, in compliance with the foregoing resolution, the following entries, *1457 with full explanation following each entry, only part of which is here set forth:
| 1928 | Dr. | Cr. | |
| March 22. | Investments | $1,120,500.00 | |
| Surplus arising from appreciation of | $1,120,500.00 | ||
| assets | |||
| March 22. | Surplus arising from appreciation of | 1,071,426.25 | |
| assets | |||
| Dividends payable | 1,071,426.25 | ||
| To record dividend declared on the | |||
| Common Stock of the Company, payable, in | |||
| Common Stock of The Islands Edison | |||
| Company at a valuation of 56.12 1/2 a | |||
| share, | |||
| March 22. | Dividends payable | 1,071,426.25 | |
| Investments | 1,071,426.25 | ||
| To record payment of dividends declared | |||
| March 22, 1928, on the common Stock of | |||
| this Company, such payment being made by | |||
| delivery of 19,090 shares of the Common | |||
| Stock of the Islands Edison Company at a | |||
| valuation of $56.12 1/2 per share |
*937 6. Thereupon, on March 22, 1928, in accordance with the resolution of the directors the petitioner distributed to its own stockholders, 19,090 shares of the stock of the Islands Edison Co., such shares representing two shares of the Islands Edison Co. stock theretofore owned by petitioner for each one share of the 9,545 shares of petitioner's*1458 own capital stock then outstanding. On the same date, March 22, 1928, the shares of stock were transferred on the stock records of the Islands Edison Co. to the individuals receiving the distribution. After transfer of the 19,090 shares, there remained in the hands of petitioner 910 shares of stock of the Islands Edison Co., which 910 shares were retained by it and a new certificate for such shares was issued to it on March 22, 1928.
7. On March 26, 1928, the stockholders of the Islands Edison Co. (one of which was the petitioner, owning 910 shares) and the Southern Cities Utilities Co., entered into a written contract of sale of the Islands Edison Co. stock. At no time did petitioner agree with Whetstone or the Southern Cities Utilities Co., verbally or in writing, to make sale to him or the Southern Cities Utilities Co. of any of said stock except the 910 shares of the Islands Edison Co.
8. The fair market value of the Islands Edison Co. stock as of March 22, 1928, was $56.12 1/2 per share, said amount being computed in the contract dated March 26, 1928, as follows:
| Total Sales Price | $3,375,000 |
| Less: Liability for bonds and preferred stock outstanding | 1,130,000 |
| Net Consideration for stock | $2,245,000 |
*1459 The net consideration, $2,245,000, divided by the number of shares, 40,000, gives a quotient of $56.12-1/2 per share.
9. Petitioner's earned surplus from operations as of December 31, 1927, was $1,360,515.96, which amount was not impaired by operating losses prior to March 22, 1928. Such surplus and all the capital of the petitioner at December 31, 1927, were invested at cost in assets of the company, of which assets only $41,152 was cash. On March 22, 1928, the total cash of petitioner was not more than $49,004.23.
10. The 910 shares of the Islands Edison Co. common stock which were retained by the petitioner after the distribution of 19,090 shares to its stockholders on March 22, 1928, were sold to the Southern Cities Utilities Co. on May 14, 1928, and a profit of $46,346.30 was reported on the 1928 return filed by the petitioner, computed as follows:
| Sale price of 910 shares at $51.25 per share | $46,437.30 |
| Cost of 910 shares at 10?? per share | 91.00 |
| Profit reported in return | $46,346.30 |
*938 The difference between the amount of $56.12 1/2 per share, set forth above as the price stated in the contract of March 26, 1928, and the amount of $51.25*1460 as shown in this paragraph as the amount received on May 14, 1928, when sale was made, is represented by brokerage charges, commissions, and other expenses incident to the consummation of the sale, which were charged against the stockholders in accordance with the provisions of the contract.
11. The petitioner received no cash or other property for the distribution of the 19,090 shares of the Islands Edison Co. common stock.
12. Petitioner, in making its income tax return for the calendar year 1928, reported no income from the disposition of the 19,090 shares of the Islands Edison common stock. The respondent, upon auditing the return, has held that petitioner corporation derived a profit of $1,069,517.25 from the disposition thereof, the explanation in the notice of deficiency being in part as follows:
It is therefore held that your corporation realized a taxable gain of $1,069,517.25 upon the distribution of The Islands Edison Company stock in payment of the dividend of $1,071,426.25, as follows:
| Distribution of 19,909 shares of stock at market value of | |
| $56.125 a share in satisfaction of dividend obligation | $1,071,426.25 |
| Cost of stock distributed, $0.10 a share | 1,909.00 |
| Profit realized | $1,069,517.25 |
*1461 OPINION.
ARUNDELL: The respondent has determined that income was realized from the transactions detailed in the findings of fact tna has asserted a tax thereon. His theory is that upon the declaration of the dividend on March 22, 1928, petitioner became indebted to its stockholders in the amount of $1,071,426.25, and that the discharge of that liability by the delivery of property costing less than the amount of the debt constituted income, citing .
There are a number of decided cases somewhat similar to this, in some of which it has been held that the distributions resulted in gain or loss to the distributing corporation. See ; . In those cases the dividend resolutions were construed as declaring dividends in definite amounts "before the property was distributed in kind." . In this last cited case it was further said:
If, on the other hand, instead of providing for a definite percentage in the way of a dividend, if the resolution*1462 had merely provided that the Liberty bonds should be distributed by way of dividends, a different situation would *939 have been presented which is clearly distinguishable from the case we have before us.
A situation like that mentioned in the quotation just given was present in ; affd., . There the banking corporation owned the stock of another company, which stock was held by trustees, and the bank's directors by resolution directed the trustees "to deliver as a dividend" a designated number of shares of the stock. "No cash dividend had been declared by the bank as a part of this transaction." . The stock at the time of distribution was worth less than cost. We held:
The petitioner, by resolution of its board of directors, of October 17, 1922, only incurred an obligation to distribute the 9,000 shares of Amalgamated Sugar Co. stock to its stockholders, which obligation it fully discharged without loss to it, by making the distribution of the stock as directed.
The facts in this case are somewhat analogous to those in *1463 , wherein we said - referring to a dividend declared by the petitioner:
* * * If, as the resolution of February 6, 1917, indicates, the petitioner merely distributed the property interest along with other dividends, we are unable to see that loss, contingent or otherwise, resulted from the distribution. * * *
The Court of Appeals of the District of Columbia in affirming our decision said:
It is true that the rule hereby adopted leads to an anomalous result, inasmuch as appellant at the time of transferring the stock had suffered an actual loss of value measured by the difference between the cost of the transferred stock and its then market price, for which no deduction is allowed. But, on the other hand, according to the same rule if the transferred stock had enhanced in value between its purchase and transfer no taxable gain would have been charged against the corporation because of that fact.
From the above cases the rule is deductible that, where the dividend resolution imposes only the obligation to distribute in kind and it is discharged in that way, no gain or loss results to the corporation. Counsel for respondent*1464 in his brief concedes this to be the correct view.
Our question then is to determine whether the resolution of March 22, 1928, was one declaring a dividend of an amount of money, or whether it declared a dividend payable in stock of the Islands Edison Co. The second paragraph of the resolution opens with the statement: "That a dividend in the amount of $1,071,426.25 be and it is hereby declared on the common stock of this Company * * *." The respondent would have us stop reading here. This, however, is only part of the resolution, and the part that immediately follows is of equal importance. The *940 next clause limits as clearly as words can the medium of discharge of the dividend liability. Without separation by as much as a punctuation mark from the part of the resolution just quoted, the words are: "payable in common stock of the Islands Edison Company * * *." Where the method of payment is prescribed a stockholder is not entitled to payment in some other form. In State v. B. & O. R.R., 6 Gill, (Md) 363, the railroad company had declared a dividend, payable in cash to holders of less than 50 shares, and payable part in cash and part in its own bonds to holders*1465 of 50 shares or more. The State of Maryland, being the owner of more than 50 shares, sued for a cash payment of the entire amount. The court denied recovery, saying in part:
It is immaterial in our view of the subject, whether the declaration of a dividend constitutes a contract, or is to be considered in the light of a performance of a duty. In either case, it is to be taken as it emanates from the board. A part of it cannot be taken and the rest discarded. It cannot be said you have declared three per cent. and we will have the money, although in the very declaration, they say they can only pay you in liabilities of the company. (P. 386).
The intent of the directors of petitioner was to declare a dividend payable in Islands Edison stock; their intent was expressed in that way in the resolution formally adopted; and the dividend was paid in the way intended and declared. We so construe the transaction, and on authority of , we hold that the declaration and payment of the dividend resulted in no taxable income.
Reviewed by the Board.
Decision will be entered for the petitioner.
BLACK, LANSDON, STERNHAGEN, MURDOCK, *1466 SEAWELL, and ADAMS dissent.