*783 Petitioners were stockholders in a corporation which readjusted its capital structure during the taxable year 1936. Prior to the readjustment the corporation's authorized, issued and outstanding capital stock consisted of 7,000 shares of common of the par value of $100 per share or $700,000. During 1936 a "plan of recapitalization" was duly executed under which the corporation's charter was amended so that, instead of its outstanding stock, its authorized stock would consist of 35,000 shares of new common of the par value of $10 per share or $350,000 and 14,000 shares of new preferred of the par value of $25 per share, or $350,000. The purpose of the recapitalization was to secure a wider holding of the corporation's shares and thereby promote a more extensive distribution of the corporation's business, and to establish a market for the shares. Petitioners exchanged their old shares for new shares and for each old share received five new shares of common and two new shares of preferred. Concurrently therewith, petitioners, through certain appointed trustees, entered into an agreement with a brokerage house to sell the preferred and 3,500 shares of new common in units of four*784 shares of preferred and one share of common. These sales were made partly during 1936 and partly during subsequent years. The gain or loss from such sales is not in issue. Held, there was a recapitalization and hence a reorganization under section 112(g)(1)(D) of the Revenue Act of 1936; held, further, petitioners exchanged their old shares in the corporation a party to a reorganization pursuant to the plan of reorganization solely for new stock in the same corporation, and under section 112(b)(3) no gain or loss should be recognized; held, further, the receipt of the preferred stock by petitioners was neither a stock dividend under section 115(f)(1) nor essentially equivalent to a dividend under section 115(g), respectively. Edith B. Bass,45 B.T.A. 1117">45 B.T.A. 1117, distinguished.
*1000 These proceedings, duly consolidated, involve deficiencies in income tax determined by the respondent against the above named petitioners for the calendar year 1936 in the amounts of $533.09; $27,586.93; $2,009.05; *785 $82,171.97; $506.46; $217.82; and $3,153.35, respectively.
The deficiencies are due primarily to thf respondent's determination that the net income as disclosed by the return of each petitioner should be increased by one major adjustment, "Increase in dividends", common to all of the petitioners. Petitioners are all stockholders of the Henry Fischer Packing Co. During the taxable year 1936 a readjustment of the corporation's capital was dffected by amendment of its articles of incorporation to provide for an authorized capital stock in the amount of $700,000 represented by 35,000 shares of common stock with a par value of $10 per share and 14,000 shares of 6 percent sinking fund cumulative preferred stock with a par value of $25 per share, instead of an authorized capital stock of $700,000 represented by 7,000 shares of common stock with a par value of $100 per share. In effecting the readjustment the corporation delivered to each of its 11 stockholders (including the 7 petitioners herein) 5 shares of new common and 2 shares of new preferred for the surrender of each share of old common previously held. The respondent determined that the fair market value of the new preferred*786 thus received by each petitioner represented a taxable stock dividend to each petitioner, respectively, and that the net income of each petitioner should be increased accordingly. Each petitioner, by appropriate assignments of error, has contested this major adjustment and contends that the readjustment of the corporation's capital was a "recapitalization" and hence a reorganization under section 112(g)(1)(D) of the Revenue Act of 1936, and that the exchange of the old common solely for new common and new preferred was nontaxable under section 112(b)(3) of the same act which provides that "No gain or loss shall be recognized if stock or securities in a corporation *1001 a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." The respondent also made one or more minor adjustments to the net income of each petitioner, but those adjustments are not at issue in these proceedings.
FINDINGS OF FACT.
Each of the petitioners is an individual, with his residence at Louisville, Kentucky, and filed his income tax return for the calendar year*787 1936 with the collector of internal revenue for the district of Kentucky.
Prior to 1909 Henry Fischer embarked upon the business of peddling meat in Louisville, and about 1909 he started on a very small scale to manufacture meat products which he sold. He had associated with him his wife, Regina Fischer, and later their only child, Carl T. Fischer, all of whom are petitioners herein. On October 31, 1923, the "Henry Fischer Packing Company" (herein sometimes referred to as the corporation) was incorporated under the laws of the Commonwealth of Kentucky with an authorized capitalization of $250,000, to take over the business theretofore operated as a sole proprietorship by Henry Fischer. The original stockholders and the amounts paid for their stock in 1923 and 1924 were as follows:
| Issued to | How paid | Amount paid |
| Henry Fischer | Assets and cash | $114,200 |
| J. L. Allgeier | Cash | 12,000 |
| E. J. Roppel | Cash | 5,000 |
| Herman Hornung | Cash | 2,000 |
| Rudy Miller | Cash | 7,000 |
| Reinert Rausch | Cash | 2,000 |
| Jacob Fischer | Cash | $3,000 |
| Emiel Fleischer | Cash | 2,000 |
| John C. Bower | Cash | 5,000 |
| Total (1,522 shares | 152,200 |
Carl T. Fischer and Regina Fischer became stockholders*788 of the corporation at a later date. Petitioner Jacob Fischer is a brother of Henry Fischer.
On February 13, 1925, the capitalization of the corporation was changed so that the common stock was $155,000 and employees' participating common stock was $95,000. Stock dividends were declared on May 1, 1925, in employees' participating stock in the amount of $46,600, being a dividend of 30.9 percent on outstanding common stock, and an additional 162 shares were sold to employees for $16,200.
On January 11, 1932, the capitalization of the corporation was increased from $250,000 to $700,000, all of which was common stock and a stock dividend of 300 percent was declared upon the outstanding common stock. New shares of common stock were issued for the *1002 outstanding employees' participating stock, share for share. A total of 6,716 new shares were thus issued as follows:
| Shares | Par value | |
| Replace original common | 1,522 | $152,200 |
| 300% stock dividend | 4,566 | 456,600 |
| Replace 30.9% stock dividend employees | 466 | 46,600 |
| To replace employees' participating stock paid for in cash | 162 | 16,200 |
| Total | 6,716 | 671,600 |
On July 31, 1936, a stock dividend of 284*789 shares, par value $28,400, was distributed so that on that date the entire authorized capital stock, amounting to 7,000 shares of a par value of $700,000, was issued and outstanding. At that time the corporation had no preferred stock or bonds authorized or outstanding.
From the date of the incorporation in 1923 up to the date of the readjustment in 1936 hereinafter mentioned, Henry Fischer owned in excess of 52 percent of the corporation's outstanding capital stock. During all of that period he was president of the corporation and the entire business was under his supervision and direction. Each of the stockholders had been trained for his or her job by Henry Fischer, and each of them devoted his or her entire time to the corporation's business. The work performed by each of them was of the character essential to the proper operation of the plant, and their connection with the corporation had resulted in building up good will for the corporation and causing it to prosper.
The corporation had pursued the policy of largely leaving the earnings of the business in the corporation, enabling it to operate principally on its own capital tather than on borrowed money. Despite this*790 policy, considerable cash dividends had been paid to the stockholders from year to year. From the date of the organization of the corporation up to and including the year 1936, cash dividends aggregating $584,961.85 had been paid to the stockholders. Tables are in the record covering the years 1923 to 1938, inclusive, showing gross assets, net income, taxable income, officers' salaries, surplus, capital stock, cash dividends, and stock dividends, but we deem it unnecessary to incorporate these tables in these findings.
The success of the corporation during the years preceding the readjustment hereinafter described was attributable to the cooperation, loyalty, and hard work of the petitioner, Henry Fischer, and the stockholding employees selected and trained by him.
Prior to the readjustment here involved, the greater part of the estate of Henry Fischer consisted of the common stock of the corporation. It was apparent to him that in the event of his death, exclusive of the corporation stock, he would not leave enough property of a *1003 liquid character to pay estate and inheritance taxes, and his son Carl was not in a position to pay the taxes and thus avoid a sale*791 of the corporation stock in event of his father's death.
Because of the success of the corporation under the management of Henry Fischer and his associates, he and the other stockholders were desirous that that management should be continued after his death. However, inasmuch as the articles of incorporation made no provision with respect to the dissolution of the corporation, under section 561 of the Kentucky Statutes it could be dissolved at any time upon the written consent of the owners of the majority of the stock. Hence it was apparent to all the stockholders that a change in the ownership of the stock of Henry Fischer would not only imperil the continuation of the management, but the very existence of the corporation. The matter apparently had not been given much consideration until about 1934, in which year one Wood Axton, who was a friend and associate of Henry Fischer and was the dominant influence in the Axton-Fisher Tobacco Co. (of which Henry Fischer had been a stockholder), died and it became necessary to sell his stock in order to satisfy inheritance and estate taxes, with the resultant loss by the Axton interests of control and management of the Axton-Fisher Tobacco*792 Co. This incident impressed Henry Fischer, who was then about sixty years old, and caused him to conclude that probably the same situation would exist in the event of his death and, further that, inasmuch as the stock of the Henry Fischer Packing Co. was not listed upon any exchange and was not actively traded in, a sale of the stock would necessarily be at a sacrifice. Henry Fischer discussed the situation with the other stockholders and with the board of directors, and they were in agreement with him that something should be done to insure continuation of the control and management after his death. Henry Fischer and the other stockholders were also of the opinion that the corporation had reached the stage when a wider distribution of its securities was desirable. It was believed that a sale of securities to the public would not only operate to create good will for the company, but would also establish a market for its stock. The problem the stockholders had in mind was discussed by Henry Fischer and other stockholders with Fischer's personal friend, Wood Hanna, a broker of Louisville and an officer of the Bankers Bond Co., sometimes hereinafter referred to as the Bond Co., and*793 the working out of the details of a plan to recapitalize the corporation and sell a part of the stock after recapitalization to the general public was left largely to Hanna and Carl Fischer.
The plan worked out and adopted to accomplish the purposes Henry Fischer and his associates had in mind was as follows:
Of the 7,000 shares of authorized common stock, 284 shares had not been issued. These shares were to be distributed to the 11 stockholders *1004 as a stock dividend. The corporation then would have outstanding 7,000 shares of common stock of the par value of $100 per share, or a total capital of $700,000. By amended articles of incorporation the authorized capital stock of the corporation was to be fixed at 35,000 shares of common stock of the par value of $10 per share and 14,000 shares of 6 percent sinking fund cumulative preferred stock of the par value of $25 per share which would have no voting rights unless the corporation should be in default in the payment of two quarterly dividends thereon, in which event it was to have equal voting rights with the common stock until the default in the payment of dividends should be made good. In the event of dissolution*794 the full par value of the preferred stock and accrued dividends thereon was to be paid before any distribution on the common stock. The newly authorized common and preferred were to be distributed exclusively to the holders of the old common at the rate of two shares of preferred and five shares of the new common for each share of the old common, and the old common was thereupon to be surrendered for cancellation. Thus, after the exchange of the old common stock for the new common and preferred, the corporation was to have exactly the same amount of capital stock, to wit, $700,000, as theretofore.
After the stockholders had received the new common and preferred stock in exchange for their old common stock, each stockholder was to turn into a common pool all of the preferred stock so received by him, and for each four shares of preferred stock so received and turned in by him he was also to turn into the pool one share of the new common stock, to the end that such preferred and new common stock might be sold to the public in units of four shares of preferred and one share of common, the proceeds from the sale of such units to be paid to the stockholders in proportion to their respective*795 interests. For convenience, Henry Fischer, Carl Fischer, and John Allgeier, petitioners herein, were to act as trustees for the stockholders to receive the old stock for delivery to the corporation for cancellation and the new stock for and on account of the stockholders. The Bankers Bond Co. was to underwrite the marketing of 7,000 shares of the preferred stock and 1,750 shares of the new common stock in units of four shares of preferred and one share of common above referred to, and to pay the proceeds thereof to the trustees for the use and benefit of the stockholders in accordance with their respective interests. After the marketing of 7,000 shares of the preferred stock and 1,750 shares of the new common stock in the manner above mentioned, the Bond Co. was to be paid by the stockholders 750 shares of the new common stock for its services. The Bond Co. was also given an option on the remaining 7,000 shares of the preferred stock and *1005 1,750 shares of the new common stock, to be exercised after the marketing of the first units was completed.
The agreement appointing the trustees was entitled "Trust Agreement, Power of Attorney and Proxy", was signed by all the*796 11 stockholders of the corporation and by the trustees, was dated August 3, 1936, and provided, in part, as follows:
WHEREAS, the undersigned are the owners and holders of all of the common stock of Henry Fischer Packing Company, a Kentucky corporation, the number of shares held by each being set out opposite our respective names; and
WHEREAS, we, and each of us, have heretofore approved and do hereby approve a certain plan under which said stock will be surrendered to Henry Fischer Packing Company in exchange for its entire new capital stock, which new stock is to consist of two classes; and
WHEREAS, we, and each of us, desire to sell and dispose of certain shares of said new stock when and as received by us pursuant to the plan of recapitalization at such times and upon such terms and conditions as may hereafter appear to be our best interests; and
WHEREAS, the consummation of the plan of recapitalization of said Henry Fischer Packing Company and the consummation of the sale of such new stock in an orderly manner will require many steps to be taken by the undersigned as stockholders, or by someone acting for and in our behalf, and in order to facilitate the prompt carrying*797 out of the plan of recapitalization and of the sale of said stock, it seems it is necessary and desirable that someone be empowered to act for us.
NOW, THEREFORE, THIS TRUST AGREEMENT, POWER OF ATTORNEY AND PROXY WITNESSETH: That we, the undersigned owners and holders of all of the presently outstanding capital stock of Henry Fischer Packing Company, have made, constituted and appointed and by these presents do make, constitute and appoint Henry Fischer, Carl Fischer and John Allgeier, or any two of them, as our Trustees to act for us and on our behalf in all matters pertaining to or affecting the recapitalization of Henry Fischer Packing Company and the sale of any or all of each class of the new capital stock when issued, with full power in said Trustee, and each or either of them, to take all steps deemed by them to be either necessary or desirable in the premises, including the following enumerated specific powers, but without their general power being limited by the setting forth of the specific powers.
* * *
It is our intention to give to the aforesaid Trustees, or any two of them, the full power to do any and everything which we, in our individual capacities, might do, *798 and so that said Trustees, or any two of them, may be fully empowered to act as though they were themselves the sole and unconditional owners of all the presently outstanding capital stock of Henry Fischer Packing Company.
The corporation thereupon filed with the appropriate authority in the State of Kentucky Amended Articles of Incorporation, which provided, among other things, as follows:
(a) The amount of the capital stock shall be $700,000, which shall be divided into 14,000 shares of 6% cumulative preferred stock of the par value of $25.00 per share and 35,000 shares of common stock of the par value of $10.00 per share.
The amended articles of incorporation then went on to describe in the usual manner the respective rights and privileges of the preferred *1006 stock and preferred stockholders and the rights and privileges of the common stock and common stockholders.
The plan of recapitalization was fully executed, the new common and preferred stock being delivered to the trustees for and on account of the stockholders and the old stock canceled on or about October 24, 1936.
The 7,000 shares of old common stock of the corporation having a par value of $100*799 each, which constituted its entire capital stock prior to the amendment of its articles of incorporation of October 22, 1936, were surrendered to the corporation and the 14,000 shares of 6 percent preferred stock of the par value of $25 per share and 35,000 shares of new common stock of the par value of $10 per share authorized by said amendment were issued to the above mentioned trustees for the use and benefit of the corporation's stockholders, on the basis of two shares of preferred and five shares of new common stock for each share of old common stock. The stock was received in a nontaxable reorganization.
In 1936 the trustees delivered 7,000 shares of the preferred and 1,750 shares of the new common stock to the Bankers Bond Co. and the trustees received from the Bankers Bond Co. $175,000, all pursuant to an agreement dated October 24, 1936, between the Bankers Bond Co. and the trustees. In 1937 the Bankers Bond Co. exercised its option under the October 24, 1936, agreement to acquire the additional 7,000 shares of preferred and 1,750 shares of the new common stock. Pursuant thereto 4,000 shares of preferred stock and 1,000 shares of the new common stock were delivered to*800 the Bankers Bond Co. by the trustees, for which they received $105,000 on December 24, 1937, and the remaining 3,000 shares of preferred stock and 750 shares of new common stock were delivered to the Bankers Bond Co. by the trustees, for which they received $78,750 on February 26, 1938. The trustees on that day delivered to the Bankers Bond Co. the 750 shares of new common stock agreed upon as commission. The trustees paid the expenses as agreed upon in the October 24, 1936, agreement.
The Bond Co. conducted an intensive selling campaign throughout the State of Kentucky to sell the units of stock of the corporation and as a part of the campaign advertised the stock in many Kentucky newspapers. As a result of this campaign, partly in 1936 and partly in the two subsequent years, all of the units of stock placed with the Bond Co. were sold, with the result that at the end of the sales campaign the number of stockholders of the corporation had increased from 11 to approximately 300.
The following table shows, as of the time of the exchange of preferred and new common stock for old common stock of the corporation, the amount of the old common stock owned by each petitioner, *1007 *801 its cost basis for income tax purposes, and the shares of preferred and new common stock received by said trustees for the use and benefit of the respective petitioners:
| Petitioner | Shares of old common owned | Cost basis | Preferred | Shares of new common received |
| Jacob Fischer | 177 | $7,240.67 | 354 | 885 |
| Carl T. Fischer | 1,783 | 54,208.96 | 3,566 | 8,915 |
| John L. Allgeier | 442 | 11,799.80 | 884 | 2,210 |
| Henry Fischer | 3,645 | 115,305.98 | 7,292 | 18,230 |
| Ed. T. Roppel | 205 | 12,996.06 | 410 | 1,025 |
| Herman Hornung | 119 | 4,876.87 | 238 | 595 |
| Regina Fischer | 541 | 19,805.22 | 1,082 | 2,705 |
The corporation did not in form declare or pay a stock dividend in preferred stock in 1936, and the total par value of its capital stock outstanding, the amount of its surplus, and the amount of its undivided profits, per books, were the same before and after the exchange of shares hereinabove described.
At the date of the recapitalization plan here involved, and prior thereto, substantially all of the business of the corporation was in Louisville and Lexington, Kentucky, and in the immediate vicinity of those two cities, approximately 80 percent of the total business being in Louisville*802 and its vicinity. Since the recapitalization and the distribution of the corporation's stock through the Bankers Bond Co., the corporation has enjoyed a wider market in Kentucky for its products than theretofore.
As set forth in the amended articles of incorporation, the new preferred stock delivered to the Bankers Bond Co. by the stockholders of the corporation for sale could be "redeemed on any quarterly dividend payment date by paying therefor in cash $26.50 per share and all unpaid accrued dividends thereon at the date fixed for such redemption upon sending by mail to the registered holders of the preferred stock at least sixty days notice of the exercise of such option." In accordance with this provision, all of the preferred stock was redeemed about four and a half years after it was issued in 1936.
In their respective income tax returns for the calendar year 1936 the petitioners reported capital gain on the sale of their respective pro rata parts of the preferred and new common stock sold by said trustees during that year and took into account the proper percentage applicable.
The stipulated facts are incorporated herein by this reference.
OPINION.
BLACK: The*803 question in all of these proceedings is the same, namely, whether the preferred stock received by the petitioners during *1008 the taxable year 1936 is taxable to them as a dividend, or whether the receipt by petitioners of the preferred and new common in exchange for the old common was a transaction upon which no gain or loss shall be recognized. If the Board determines that petitioners received the preferred stock and new common stock in a nontaxable reorganization, then the Commissioner concedes that the gains of petitioners on the sale of the stock are taxable as capital gain and that petitioners have correctly computed the gains on the stock which was sold in the taxable year.
The respondent contends, however, that when petitioners exchanged their old common stock for new preferred and new common the fair market value of the preferred represented a taxable stock dividend to petitioners under section 115(a) and (f)(1) of the Revenue Act of 1936, or, in the alternative, was "essentially equivalent to the distribution of a taxable dividend" under section 115(g) of the same act. These provisions of the statute are set out in the margin. 1
*804 On the other hand, the petitioners contend that the readjustment in question was not a distribution of a preferred stock dividend on common stock, but was in fact and reality an exchange, in pursuance of a plan of reorganization, of old common stock in a corporation a party to a reorganization solely for new common and new preferred stock in such corporation, and, that under section 112 of the Revenue Act of 1936 no gain or loss shall be recognized on such an exchange. The material provisions of section 112 are in the margin. 2
*805 The real question, therefore, is whether the readjustment outlined in our findings of fact was in substance the distribution by the corporation *1009 of a "dividend", and controlled by section 115 of the Revenue Act of 1936, or was an "exchange" of stock for stock and controlled by section 112 of the same statute.
If the readjustment was a distribution by the corporation of a stock dividend, as respondent contends, our decision would have to be for the Commissioner upon the authority of Koshland v. Helvering,298 U.S. 441">298 U.S. 441; Helvering v. Gowran,302 U.S. 238">302 U.S. 238; Helvering v. Pfeiffer,302 U.S. 247">302 U.S. 247; Frank J. and Hubert Kelly Trust,38 B.T.A. 1014">38 B.T.A. 1014; Eighth Circuit opinion affirming Board withdrawn, 106 Fed.(2d) 1002; Albert E. Smith,39 B.T.A. 80">39 B.T.A. 80. For reasons hereinafter given, we do not think that the said readjustment can be held to be a distribution of a stock dividend or a distribution essentially equivalent to the distribution of a taxable dividend under section 115(g). Therefore, we do not think that the above cases cited by respondent are in point.
*806 We do not think it can reasonably be disputed that both in form and in substance there was an "exchange" of old stock for new stock in the same corporation. In Baltimore & Ohio Railroad Co. v. Western Union Telegraph Co.,241 Fed. 162; affirmed per curian, 242 Fed. 914, the District Court (S. Dist. N.Y.), at p. 170, said:
(a) "Exchange" has a well-settled meaning in common acceptation. Webster's definition is:
"The act of giving or taking one thing for another which is regarded as an equivalent; as an exchange of cattle for grain."
* * *
This popular meaning of "exchange" used and understood in the common speech of people has been accepted and defined by Codes and courts. * * *
Petitioners in fact delivered to the corporation their old common stock in the corporation of a par value of $100 per share, and for each share so delivered they received five new shares of common stock of a par value of $10 per share and two new shares of preferred stock of a par value of $25 per share in the same corporation. We hold that this was an "exchange" of stock for stock in the same corporation.
*807 In order for petitioners to avoid recognition of gain or loss under section 112(b)(3), supra, in connection with their exchange of stock solely for stock in the same corporation, it must appear that there *1010 was a "reorganization" and that the exchange of stocks was "in pursuance of the plan of reorganization." Section 112(g)(1), supra, defines the term "reorganization" to mean, among several things, "(D) a recapitalization." Under a statute similar to section 112(g)(1)(D), we held in H. E. Muchnic, Administrator,29 B.T.A. 163">29 B.T.A. 163, that, where the petitioner in that case exchanged a part of the outstanding common stock of a corporation for previously authorized but then unissued preferred stock of the same corporation, the exchange effected a recapitalization of the corporation constituting a statutory reorganization and was a transaction upon which no gain or loss was recognizable. Our observations in that case are likewise applicable here. Cf. Walter F. Haass,29 B.T.A. 900">29 B.T.A. 900; affirmed without opinion January 14, 1936.
After briefs were filed in these proceedings, *808 Strassburger v. Commissioner, 124 Fed.(2d) 315, and Edith B. Bass,45 B.T.A. 1117">45 B.T.A. 1117; on review, C.C.A., 1st Cir., were decided, and the Commissioner by permission amended his brief and cited those two cases, urging them as authorities supporting his position. We think the Strassburger case is clearly not in point. It was simply a case where admittedly a dividend on common stock had been paid in preferred stock and the question was whether such dividend was taxable. The Board held that it was and the Second Circuit affirmed. No question of an exchange in reorganization was raised in that case or was in any way involved. The Strassburger case is similar to the several cases cited by respondent in his brief which we have already held not to be in point.
The Bass case requires more attention. We have carefully considered it and all its facts, and we think it is distinguishable on its facts from the instant case. In the Bass case, prior to the alleged reorganization of Bird & Son, Inc., by recapitalization there were outstanding 600,000 shares of no par value common stock. The capital stock account of the corporation*809 showed a stated capital stock of $6,000,000 represented by these 600,000 shares of no par value common stock. When the plan of alleged recapitalization was complete the capital account of the corporation showed $3,000,000 represented by 600,000 shares of no par value common stock and $3,000,000 represented by 30,000 shares of preferred stock. The taxpayer was the owner prior to the alleged reorganization of a voting trust certificate representing 54,510 shares of common stock of the corporation. She surrendered that certificate and received a certificate for 54,510 shares of common stock of no par value and a certificate for 2,725 1/2 shares of preferred stock. We held that the 2,725 1/2 shares of preferred stock which the taxpayer received were received as a dividend on her common stock and were taxable to her *1011 in the amount of the fair market value of such preferred shares. In thus holding, we said, among other things:
* * * The record fails to disclose any business purpose or substance in the surrender of the original certificate for 600,000 shares of no par common, the issuance of a certificate for 300,000 shares of that stock, the cancellation of that certificate, *810 and the issuance of another certificate for 600,000 shares of the same kind of stock. The same result could have been reached, so far as this record shows, by merely issuing a certificate for 30,000 shares of preferred stock, allowing the voting trustees to retain the original certificate for 600,000 shares of no par common, and making book entries showing that 30,000 shares of preferred represented $3,000,000 of capital and the 600,000 common shares without par value had henceforth a stated value of $3,000,000. The stated value of the common stock could have been reduced without changing the certificate. All semblance of an exchange disappears if the steps taken in regard to the certificates for the common stock are disregarded.
In the instant case the facts, unlike those present in the Bass case do show a business purpose in the recapitalization. We think this business purpose has been definitely established by competent evidence. Prior to the recapitalization the stock of the corporation was closely held by members of the Fischer family and a few key employees of the corporation. It was desired to have the stock of the corporation more widely held and to establish a*811 ready market for it and at the same time not lose control by those who had built the corporation from a very small beginning and were responsible for its notable success.
Therefore, after consultation among the stockholders themselves and with an established bond company of Kentucky, the plan of recapitalization of the corporation was agreed upon and arrangements were made with the bond company to market the preferred stock along with certain shares of the new common stock. Full details of these plans and their execution are embodied in our findings of fact and need not be repeated here. Suffice it to say that, when the sales of the new stock which it had planned to sell were completed, the corporation had approximately 300 shareholders residing in different parts of the State of Kentucky, instead of 11 shareholders prior to the recapitalization. As a result of these efforts, the business of the corporation became more widely extended in the State of Kentucky and a wider market for the stock of the corporation was established.
In view of these facts, we think respondent's contention that the recapitalization of the corporation was not bona fide and was lacking of any business*812 purpose, and was effected merely to disguise a taxable stock dividend, can not be sustained. We think the facts cited just above and others in the record make the instant case distinguishable from Edith B. Bass, supra, and they cause us to reach a conclusion different from the one reached in that case.
*1012 The record establishes, we think, that the exchange of the old common stock in the cases at bar for the new common and preferred was in pursuance of a plan of reorganization theretofore agreed upon. The Henry Fischer Packing Co. was a party to its own reorganization organization as that term is defined in section 112(g)(2), supra. We hold, therefore, that under section 112(b)(3), supra, no gain or loss shall be recognized upon the exchange made by petitioners, in pursuance of the plan of reorganization, of their old common stock in the corporation a party to the reorganization solely for new common and new preferred stock in the same corporation. From this holding it necessarily follows that the preferred stock received by petitioners did not represent a taxable dividend to petitioners under section 115(a) and (f)(1) of the Revenue Act of 1936*813 and its issuance was not "essentially equivalent to the distribution of a taxable dividend" under section 115(g) of the same act. Cf. South Atlantic Steamship Line,42 B.T.A. 705">42 B.T.A. 705; Skenandoa Rayon Corporation,42 B.T.A. 1287">42 B.T.A. 1287; affd., 122 Fed.(2d) 268.
The parties have stipulated that "if the stock was received in a nontaxable reorganization" and we have held that it was so received, then, "the computation of tax in each of said returns was properly made except as indicated in paragraphs 15 and 16, and the note to paragraph 3 hereof." Effect will be given to this part of the stipulation under Rule 50.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Carl T. Fischer; John L. Allgeier; Henry Fischer; Ed. J. Roppel; Herman Hornung; and Regina (Mrs. Henry) Fischer. ↩
1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title (except in section 203(a)(3) and section 207(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
* * *
(f) STOCK DIVIDENDS. -
(1) GENERAL RULE. - A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.
* * *
(g) REDEMPTION OF STOCK. - If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. ↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) EXCHANGES SOLELY IN KIND. -
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(3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
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(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means * * * (D) a recapitalization, * * *
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. ↩