Decision will be entered under Rule 50.
Petitioner acquired control of a corporation engaged in a similar business by issuing its own shares in exchange for the shares of the acquired corporation. As a part of the bargain it agreed to repurchase its own shares at their book value at transferees' options. Said options were exercised, and petitioner immediately included the repurchased shares in a public offering where they were sold for substantially less than the option price. Held: Petitioner's dealings in its own shares were entirely intracorporate and nonspeculative. Its speculation was in the stock and business of the corporation which it acquired, not in its own shares. It did not deal in its own shares as it might have in the shares of another corporation and therefore sustained no deductible loss within the meaning of sec. 39.22(a)-15, Regs. 118.
52 T.C. 659">*659 Respondent has determined a deficiency in petitioner's Federal income taxes for the fiscal year ended January 31, 1959, in the amount of $ 61,245.43. Concessions have been made by both parties so that the only issue remaining 1969 U.S. Tax Ct. LEXIS 91">*92 for decision is whether petitioner is entitled to a long-term capital loss carryover arising out of its purchase and resale of its own shares.
FINDINGS OF FACT
Most of the relevant facts have been stipulated and they are so found.
Petitioner, Thalhimer Bros., Inc. (hereinafter sometimes referred to as Thalhimer), is a Virginia corporation with its principal office in Richmond, Va. During the period in issue and during all other relevant years, petitioner maintained its books and records on an accrual method of accounting based upon fiscal years. Its Federal income 52 T.C. 659">*660 tax return for the period ending January 31, 1959, was filed with the district director of internal revenue at Richmond, Va.
Thalhimer's major activity is the operation of a department store in downtown Richmond, Va. In 1949 Thalhimer entered into negotiations with Morris, Lillian, and Samuel Sosnik (the Sosniks) to purchase their stock in Sosnik and Sosnik, Inc., a North Carolina corporation, operating a specialty shop in Winston-Salem.
Originally the Sosniks wanted to receive cash for their shares. However, at that time Thalhimer did not have sufficient cash for this purpose. In lieu of cash it offered its common stock 1969 U.S. Tax Ct. LEXIS 91">*93 in an amount whose book value would equal the book value of the Sosniks' shares. The Sosniks were hesitant to accept Thalhimer's shares as there was no established market in which Thalhimer's shares were traded. To allay the Sosniks' fears, Thalhimer then offered to repurchase the stock at its book value at the Sosniks' option at any time within a 3-year period beginning in 1951.
On July 12, 1949, Thalhimer and the Sosniks entered into an agreement calling for the Sosniks to deliver to Thalhimer all of the outstanding Sosnik and Sosnik, Inc., shares in return for 12,198 shares of Thalhimer $ 10 par value common stock which stock was equal in book value to Sosnik and Sosnik's book value.
As regards Thalhimer's transfer of shares to the Sosniks, the agreement provided inter alia that, at the Sosniks' option, from February 1, 1951, through January 31, 1954, Thalhimer would repurchase its shares at the stock's book value, such value to be computed at certain specified dates. It also provided that Thalhimer, at its option, could similarly purchase its stock from the Sosniks during the same period for 110 percent of its book value. In addition, each Thalhimer share transferred to the Sosniks 1969 U.S. Tax Ct. LEXIS 91">*94 was to carry a legend, which limited its holding, ownership, and transfer to the terms of the agreement.
The relevant provisions of the agreement read as follows:
1. At any time during the three year period beginning on February 1, 1951 and ending on January 31, 1954, Thalhimer, at its option, may purchase all of its common stock delivered to The Sosniks in accordance with the provisions of Article II hereof at its book value as of the 31st day of that January or July which next precedes the date of the exercise of such option, (such book value to be determined in accordance with sound accounting practices by the firm of Certified Public Accountants then regularly employed by Thalhimer for auditing its books) plus a premium equal to ten per cent (10%) of the book value so determined. In the event Thalhimer exercises the option hereby given to it, written notice thereof shall be given to each of the then owners of said stock, by first class mail addressed to their address last furnished Thalhimer by them, and simultaneously therewith Thalhimer shall furnish or make available to such firm of Accountants all books and records of Thalhimer deemed by such firm necessary in order to enable 1969 U.S. Tax Ct. LEXIS 91">*95 it to properly determine the book value of said 52 T.C. 659">*661 common stock as of the valuation date above specified. The said firm of Accountants shall promptly thereafter furnish to each of the parties hereto a certificate, under the seal of said firm of Accountants, setting forth the book value of each share of common stock of Thalhimer issued and outstanding as of the date aforesaid, together with appropriate copies of balance sheets and profit and loss sheets used by the Accountants in determining the value. The cost of such determination shall be borne by Thalhimer. Upon receipt of such notice and of the aforesaid certificate of said firm of Accountants, each owner of stock of Thalhimer acquired pursuant to this agreement, shall within thirty days thereafter deliver the full number of shares of said stock then owned by him or her, properly endorsed to Thalhimer at its office in Richmond, Virginia, in exchange for cash for the full amount due thereon in accordance with the provisions of this paragraph. In the event of failure or refusal on the part of any then owner of any of said shares of stock to comply with the provisions of this agreement, then, upon the expiration of said thirty day 1969 U.S. Tax Ct. LEXIS 91">*96 period all rights, of every nature whatsoever, with respect to said shares of common stock so purchased shall forthwith cease and determine except only the right of the holder or holders to receive the purchase price therefor.
2. At any time during the three year period beginning on February 1, 1951 and ending on January 31, 1954, any of the then owners of Thalhimer common stock acquired pursuant to the terms of this agreement may demand in writing of Thalhimer that it purchase from such owner all or any part of the said stock then owned by him or her and upon receipt of such demand Thalhimer shall be obligated to purchase and shall purchase from such owner the number of shares of said stock specified in such written demand. The obligation of Thalhimer to purchase such stock shall, however, be subject to the following conditions and limitations:
(a) Thalhimer shall be obligated to pay for the shares of stock so to be purchased the book value of said shares calculated as above provided in subparagraph 1 of this Article IV. The said notice shall specify the number of shares of stock to be purchased by Thalhimer. Upon receipt of such notice Thalhimer shall forthwith request its said 1969 U.S. Tax Ct. LEXIS 91">*97 firm of Certified Public Accountants to determine in accordance with sound accounting practices the book value of the shares so to be purchased as of the said valuation date. Thalhimer agrees to furnish to such firm of Accountants all books and records of Thalhimer deemed by said firm necessary in order to enable it to properly determine the book value of said common stock as of the said valuation date. Said firm of Accountants shall promptly thereafter furnish to each of the parties here to a certificate under the seal of said firm of Accountants setting forth the book value of each share of common stock of Thalhimer issued and outstanding as of the said valuation date aforesaid, together with appropriate copies of balance sheets and profit and loss sheets used by the Accountants in determining the value. The cost of such determination shall be borne by Thalhimer. Subject to the provisions of subparagraph (c), infra, Thalhimer, within ten days after receipt of said certificate from said firm of Accountants, shall pay to said selling stockholder, in exchange for the certificate or certificates of stock (properly endorsed to Thalhimer by the stockholder), an amount equal to the said 1969 U.S. Tax Ct. LEXIS 91">*98 book value of said shares. In the event of failure or refusal on the part of Thalhimer to pay for said shares in accordance with the terms and provisions of this agreement the selling stockholder shall have the right at the expiration of thirty (30) days after receipt of said certificate from said firm of Accountants to take all legal steps deemed by him or her to be necessary to enforce performance of this agreement.
52 T.C. 659">*662 (b) If the selling stockholder owns less than 1000 shares of said stock, then Thalhimer shall not be obligated to purchase said stock unless the selling stockholder offers to sell all shares then owned by him or her; and if said stockholder owns more than 1000 shares Thalhimer shall not be obligated to purchase said stock unless the selling stockholder offers to sell at least 1000 shares of the stock then owned by him or her; and Thalhimer shall not be obligated to purchase any of said stock unless the total amount offered to it at any one time shall aggregate at least 500 shares; and Thalhimer shall not be obligated to make more than one purchase of any of the shares of stock originally issued to any one of the Sosniks, in any one calendar year.
(c) If more than 1250 1969 U.S. Tax Ct. LEXIS 91">*99 shares of said stock shall during the period between February 1, 1951 and January 31, 1954, be offered to Thalhimer in any year by any one stockholder, or if more than 3750 shares of said stock shall during the said period be offered to Thalhimer in any one year by all of the stockholders holding stock issued pursuant to this agreement, then, and in either of such events, Thalhimer may, at its option, elect either (1) to pay cash for said stock in the manner hereinabove provided in subparagraph (a), or (ii) to pay one-third (1/3) of the purchase price in cash and to give to the selling stockholder or stockholders its note or notes for the balance of the purchase price -- such note or notes to bear interest at four per cent (4%) per annum and to be payable as follows: -- one-half (1/2) thereof on or before one year from date of note and the remaining one-half (1/2) on or before two years from date of note. All shares of stock so purchased by Thalhimer shall at the date of purchase be transferred to Thalhimer in exchange for cash and notes, if any, as hereinabove provided.
3. In connection with the determination of book value for the purpose of the agreement the calculation shall be 1969 U.S. Tax Ct. LEXIS 91">*100 based on the consolidated balance sheet of Thalhimer and such balance sheet shall be prepared in accordance with sound accounting practices and principles, provided, however, that nothing herein contained shall prevent Thalhimer, in due course of business, from making such changes in its accounting practices and procedure as conform to them sound recognized accounting principles approved and recommended by the Certified Public Accountants duly and regularly employed by Thalhimer.
4. Each and every certificate representing a share or shares of said twelve thousand one hundred ninety eight shares (12,198) of stock of Thalhimer is and shall be held, owned and transferred subject to all of the terms and conditions of this agreement and a signed copy of this agreement shall be filed with the Secretary of Thalhimer and shall remain on file with Thalhimer until February 1, 1954 or such time as the within agreement shall be cancelled prior thereto by the mutual action of the parties hereto.
5. Each and every of said stock certificates to be issued shall have written across its face and signed by a proper officer of Thalhimer, the following words, "This certificate is held and owned and is to 1969 U.S. Tax Ct. LEXIS 91">*101 be transferred only in accordance with all of the terms and conditions of a certain agreement between Thalhimer Brothers, Incorporated, Morris Sosnik, Lillian Sosnik and Samuel Sosnik, dated July 12, 1949, a copy of which agreement is, and shall remain, on file with Thalhimer Brothers, Incorporated."
In a letter from Thalhimer to the Sosniks, also dated July 12, 1949, Thalhimer agreed to a modification to paragraph 1 of the above provisions. Pertinent parts of such letter read:
We have today entered into an agreement with you for the purchase from you of all issued and outstanding shares of the common capital stock of Sosnik and 52 T.C. 659">*663 Sosnik, Incorporated. Subparagraph 1 of Article IV of said agreement reads as follows:
* * * *
It was not the purpose or intent of Thalhimer's in suggesting the inclusion in said agreement of the foregoing paragraph to provide a means whereby this corporation could, for its own profit and benefit, reacquire the shares of its common stock from you and shortly thereafter resell or exchange the stock so reacquired at a profit. To assure you as to our good faith in this matter, we hereby agree that in the event this corporation shall at any time during the period 1969 U.S. Tax Ct. LEXIS 91">*102 above specified -- to-wit, between February 1, 1951, and January 31, 1954 -- exercise the option given to this corporation in said agreement (in the manner hereinabove set forth) to purchase said shares of stock, and in the event that within one year after such purchase this corporation or the owners of a majority interest in the voting stock of this corporation shall make a sale or an exchange of a majority interest in the voting stock of this corporation to any other person, firm or corporation, we hereby agree that this corporation shall upon the consummation of such sale or exchange pay to you (in the proportions to each stockholder as set forth in said agreement) the profit, if any, realized by this corporation on the shares so repurchased from you.
On July 15, 1949, the parties transferred the shares of stock called for by the July 12, 1949, agreement. The Thalhimer stock was distributed as follows:
| Shares | |
| Morris Sosnik | 4,066 |
| Lillian Sosnik | 4,066 |
| Samuel Sosnik | 4,066 |
| Total | 12,198 |
Immediately prior to the issuance and delivery of said 12,198 shares of petitioner's common stock to the Sosniks, petitioner had 24,208 shares of $ 3.65 cumulative preferred stock of $ 100 par value issued 1969 U.S. Tax Ct. LEXIS 91">*103 and outstanding. There were also 255,000 shares of $ 10 par value common stock issued, of which 242,500 were actually outstanding and 12,500 were held by petitioner as treasury stock. Immediately following the issuance and delivery of the 12,198 shares to the Sosniks, petitioner had the same 24,208 shares of preferred stock issued and outstanding and had issued 267,198 shares of common stock, of which 254,698 were outstanding and 12,500 were held by petitioner as treasury stock. The 12,198 Thalhimer shares issued to the Sosniks were previously unissued shares.
Petitioner subsequently made the following journal entry upon its books to record the delivery of the 12,198 shares to the Sosniks and the receipt of the Sosnik and Sosnik, Inc., stock:
| Investment -- Sosnik and Sosnik, Inc | $ 378,119.21 | |
| Capital stock -- common | $ 121,980.00 | |
| Capital surplus | 256,139.21 |
52 T.C. 659">*664 On August 3, 1949, Samuel Sosnik transferred 1,316 of his 4,066 shares to his wife Bune and his three children as follows:
| Shares | |
| Bune Sosnik | 566 |
| Robert Sosnik | 250 |
| Rebecca Sosnik Kolman | 250 |
| Nestor Sosnik | 250 |
| Total | 1,316 |
| Samuel Sosnik | 2,750 |
| 4,066 |
On 1969 U.S. Tax Ct. LEXIS 91">*104 or about May 6, 1952, petitioner's articles of incorporation were amended so as to change the par value of its common capital stock from $ 10 per share to $ 5 per share and each share of its common capital stock of $ 10 par value was subsequently exchanged for 2 shares of its new common capital stock of $ 5 par value. As a result of this exchange the Sosniks, including Samuel Sosnik's wife and children, acquired 24,396 shares of petitioner's $ 5 par value common stock in exchange for the 12,198 shares of $ 10 par value common stock.
Prior to March 31, 1953, there was no quoted market for petitioner's common stock. On January 31, 1953, its stock was held as follows:
| Holder | Shares | Per Cent |
| W. B. Thalhimer, his wife, his two sons and their families | 349,000 | 68.51 |
| Irving May and family | 124,000 | 24.34 |
| The Sosniks | 24,396 | 4.79 |
| Sam Stern, a vice president of Petitioner | 10,000 | 1.96 |
| William B. Thalhimer and Annette G. Thalhimer Fund, Inc | 2,000 | .40 |
| 509,396 | 100.00 |
There had been no substantial change in these relative stockholdings since 1940, except for the issue of stock to Sam Stern and the Sosniks and the transfer of stock to the William B. Thalhimer and Annette G. Thalhimer Fund, Inc.
On March 11, 1953, the Sosniks, 1969 U.S. Tax Ct. LEXIS 91">*105 by written notice to petitioner, formally exercised their right under article IV, section 2, of the July 12, 1949, agreement to require petitioner to purchase the 24,396 shares of petitioner's common stock.
On March 12, 1953, petitioner filed a registration statement and other documents with the Securities and Exchange Commission under the Securities Act of 1933 in connection with a proposed sale of 101,500 shares of its common stock of $ 5 par value, 99,000 shares to be sold by petitioner and 2,500 shares to be sold by Irving May.
On March 13, 1953, the Sosniks (including Samuel's wife and children) transferred and delivered to petitioner 18 certificates evidencing 52 T.C. 659">*665 in the aggregate 24,396 shares of petitioner's common capital stock of $ 5 par value with appropriate stock-transfer stamps. Simultaneously, petitioner was issued one certificate (No. 146) in its name for the 24,396 shares and the 18 certificates were canceled.
Each of the 18 canceled certificates and all other certificates of petitioner's common stock, while held by the Sosniks, bore the following legend:
This certificate is held and owned and is to be transferred only in accordance with all of the terms and conditions of 1969 U.S. Tax Ct. LEXIS 91">*106 a certain agreement between Thalhimer Brothers, Incorporated, Morris Sosnik, Lillian Sosnik and Samuel Sosnik, dated July 12, 1949, a copy of which agreement is, and shall remain, on file with Thalhimer Brothers, Incorporated.
On March 17, 1953, petitioner, under the formula specified in article IV, section 2, of the July 12, 1949, agreement, paid the Sosniks $ 491,036.88. In its cash disbursements journal and in its general ledger account entitled "Treasury Stock -- Common," petitioner made the following entries:
To record purchase of 24,396 shares of $ 5 par value stock from the following individuals:
| Ref. | |||
| Ref. | Date | 1 Dr. | |
| Morris Sosnik | CD | 3.17 | $ 163,678.95 |
| Lillian Sosnik | CD | 3.17 | 163,678.94 |
| Samuel Sosnik | CD | 3.17 | 110,702.68 |
| Bune Sosnik | CD | 3.17 | 22,784.62 |
| Rebecca Sosnik Kolman | CD | 3.17 | 10,063.88 |
| Nestor Sosnik | CD | 3.17 | 10,063.88 |
| Robert Sosnik | CD | 3.17 | 10,063.88 |
On March 31, 1953, petitioner's registration statement, as amended, became final. The shares were offered at $ 11, which included an underwriting discount of 95 cents per share to produce net proceeds to petitioner of $ 994,950 before estimated selling expenses 1969 U.S. Tax Ct. LEXIS 91">*107 of $ 24,870. The prospectus issued with the registration stated, inter alia, that the proceeds of the offering were to be used as follows:
The net proceeds to be received by the Company from the sale of the shares offered hereby, after deducting expenses payable by the Company in connection therewith, estimated at $ 24,870, will amount to approximately $ 970,080. Such net proceeds will, in the first instance, be added to the general funds of the Company to be available for general corporate purposes, including working capital and expenditures for additions and improvements to its facilities. The principal capital addition being considered by the Company is the extension of the main store building referred to under "Properties". The Company cannot represent when or if such construction will be started but the Company does not believe that it could be completed before the middle of 1954. It is the present intention of the Company not to undertake such construction if the cost would be materially in excess of $ 1,100,000. 24,396 of the shares offered hereby were repurchased by the Company from seven stockholders in March, 1953, pursuant to an agreement 52 T.C. 659">*666 with them referred to under 1969 U.S. Tax Ct. LEXIS 91">*108 "Management", at their book value at January 31, 1953 for an aggregate of $ 491,036.83. All of these shares were originally issued for the acquisition of Sosnik & Sosnik, Incorporated, Winston-Salem, North Carolina, referred to under "History and Business."
The Company has been in the past, and expects to continue to be, a borrower of funds on a short term basis to finance part of its seasonal inventory and other requirements and may also undertake additional financing or incur additional indebtedness for property additions or other purposes.
On April 4, 1953, petitioner made the following entry in its journal and general ledger:
| Acct. No. | Dr. | Cr. | |
| Accts' Receivable (Kidder, Peabody & Co.)- | 3-61 | 994,950.00 | |
| Common Stock Outstanding | 100-12 | 373,020.00 | |
| Treasury Stock -- Common | 100-13 | 245,179.80 | |
| Paid-In-Surplus | 110-15 | 376,750.20 |
(To record the issuance of 74,604 shares of 5.00 par value common stock and the sale of 24,396 shares of 5.00 par value treasury common stock, at the initial public offering price of 11.00/share less underwriting discount of $ .95/share thereby leaving net proceeds to the Company of 10.05 share. These shares were offered for sale on April 1, 1953 by Kidder, Peabody & Co., 1969 U.S. Tax Ct. LEXIS 91">*109 et al. in accordance with a Prospectus issued by Thalhimer Brothers, Inc., dated March 31, 1953. Item #33 of the Company's registration statement, form S-1 as filed with the Securities and Exchange Commission reads as follows: "Upon the issue of 74,604 shares of Common Stock to be sold by the Company, 5.00 per share of the net proceeds will be credited to Common Stock and the excess of the net proceeds to the Company over 5.00/share will be credited to Capital Surplus". "The proceeds from the sale of the 24,396 shares of the Treasury Common Stock are to be credited to the Treasury Stock Account, and the difference between the cost and proceeds from the sale of such shares is to be charged to Capital Surplus.")
| Acct. No. | Dr. | Cr. | |
| Capital surplus | 110-15 | 245,857.03 | |
| Treasury stock -- common | 100-13 | 245,857.03 |
(To charge Capital Surplus with difference between the cost and proceeds of sale of 24,396 shares of Treasury Stock -- Common)
On April 7, 1953, petitioner's sale of its 99,000 shares of common stock was closed. Pursuant to petitioner's registration statement it issued and delivered certificates for 99,000 Thalhimer shares in the names of the underwriters. Of those shares 24,396 shares were 1969 U.S. Tax Ct. LEXIS 91">*110 issued out of certificate No. 146, which certificate was then canceled.
On the same date $ 994,950, paid by the underwriters for 99,000 shares, was credited to petitioner's bank account with the Irving Trust Co., New York, N.Y. This transaction was reflected in petitioner's journal and ledger on May 2, 1953, as follows:
| Acct. No. | Dr. | Cr. | |
| Irving Trust Co | 1-18 | 994,950.00 | |
| Sundry Accts. Rec | 3-61 | 994,950.00 |
(Record deposit in Irving Trust Company by Kidder, Peabody & Co. certified check # 182979 on April 9, 1953, in payment for Common Stock issue)
52 T.C. 659">*667 The underwriters subsequently sold the 99,000 shares to the public and new certificates were then issued to the new shareholders.
The amount petitioner received for the 24,396 shares before selling expenses, other than the underwriting discount, was $ 245,179.80. 2 Petitioner's expenses, not including underwriting commissions, attributable to the sale of the 99,000 shares of common stock, totaled $ 21,181.41, 2 or $ 0.2442567 2 per share. The expense thus attributable to the 24,396 shares of common stock acquired from the Sosniks was $ 5,958.99. 2
On its Federal income tax returns for its taxable 1969 U.S. Tax Ct. LEXIS 91">*111 year ended January 30, 1954, and for each succeeding taxable year through January 31, 1959, petitioner claimed a capital loss from the purchase and sale of the 24,396 shares of its common capital stock in the amount of $ 251,816.02 computed as follows:
| Mar. 17, 1953, purchase price | $ 491,036.83 |
| Apr. 7, 1953, selling price | 245,179.80 |
| Loss before expenses of sale | 245,857.03 |
| Add, expenses of sale | 5,958.99 |
| Total loss claimed | 251,816.02 |
In addition, petitioner realized a net capital loss in its taxable year ended January 28, 1956, in the amount of $ 20,430.02, for a total capital loss carryover claimed by petitioner of $ 272,246.04. Petitioner realized a capital gain of $ 1,137.05 in its taxable year ended February 1, 1958, against which a part of its capital loss carryover was applied, leaving a claimed balance of $ 271,108.99 carried over to the year ended January 31, 1959. During its taxable year ended January 31, 1959, petitioner realized a long-term capital gain from the sale of a parcel of real estate in the amount of $ 382,254.59.
In his statutory notice of deficiency respondent, inter alia, disallowed any loss carryover from petitioner's 1953 purchase and resale of its common stock 1969 U.S. Tax Ct. LEXIS 91">*112 and determined the $ 61,245.43 deficiency shown above.
On July 12, 1961, petitioner paid said sum of $ 61,245.43 with interest thereon to the date of payment.
ULTIMATE FINDING OF FACT
At all relevant times, petitioner's dealings in its own shares were for intracorporate, nonspeculative purposes; it was not "dealing in its own shares as it might in the shares of another corporation."
52 T.C. 659">*668 OPINION
The question in the instant case is whether petitioner suffered a deductible loss on the sale of its treasury stock in 1953, and consequently is entitled to a capital loss carryover to the taxable year in issue. Section 1032(a) of the Internal Revenue Code of 1954 specifically prohibits any recognition of gain or loss on sales or exchanges of a corporation's own stock. 31969 U.S. Tax Ct. LEXIS 91">*114 However, the instant case arises under the Internal Revenue Code of 1939 and is specifically governed by section 39.22(a)-15, Regs. 118, which reads as follows:
Sec. 39.22(a)-15 Acquisition or disposition by a corporation of its own capital stock. (a) Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, 1969 U.S. Tax Ct. LEXIS 91">*113 which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
(b) However, if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.
The above regulation has been considered in numerous cases and its validity is no longer questioned. See United States v. Anderson, Clayton & Co., 350 U.S. 55">350 U.S. 55 (1955); Dr. Pepper Bottling Co. of Miss., 1 T.C. 80">1 T.C. 80 (1942); Hercules Powder Co. v. United States, 180 F. Supp. 363">180 F. Supp. 363 (Ct. Cl. 1960); General Electric Co. v. United States, 299 F.2d 942 (Ct. Cl. 1962); Girard Trust Corn Exchange Bank v. United States, 191 F. Supp. 551">191 F. Supp. 551 (E.D. Pa. 1961).
We agree with the Court of Claims that the rationale behind the above regulation is tenuous at best and that the distinction between a corporation's dealing in its own shares as it might in the shares of another corporation and other types of dealings is not one readily recognized. See 180 F. Supp. 363">Hercules Powder Co. v. United States, supra. We also agree with that court's following characterization of the approach to be taken in applying the statute (180 F. Supp. 363">180 F. Supp. at 366):
The problem in a particular case would seem to be, then, how much does the activity of the corporation look like the activity of an outside investor and 52 T.C. 659">*669 speculator in its stock. A slight resemblance would seem to be insufficient 1969 U.S. Tax Ct. LEXIS 91">*115 to justify the distinction.
In 1 T.C. 80">Dr. Pepper Bottling Co. of Miss., supra, we held that the nontaxable antithesis to a corporation's dealing in its shares as it might in the shares of another corporation occurred if the transaction was "a capital transaction," i.e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation. We then stated the following three propositions (1 T.C. 80">1 T.C. 84):
We view these decisions as establishing the propositions, first, that whether a corporation's dealings in its own stock result in tax consequences to the corporation, depends upon the character and purpose of the purchase and of the sale and their relationship to each other; second, that if their true nature is a readjustment of capital, no taxable gain or loss occurs even though the result is more than a mere bookkeeping process and the outcome may in a real sense be a benefit or detriment to the corporation's economic position; and, third, that one test of the true nature of the transaction is whether the corporation has dealt in its stock in the same way that it would in the stock of another corporation. This proceeds from a mere matter 1969 U.S. Tax Ct. LEXIS 91">*116 of construction and entirely without reference to any constitutional question of the power to tax such transactions in a different context of statutory interpretation. See Koshland v. Helvering, 298 U.S. 441">298 U.S. 441; Helvering v. Gowran, 302 U.S. 238">302 U.S. 238.
In subsequent cases we applied the above propositions to determine the "real nature of a transaction" in opposition to some courts which had adopted the position that unless the corporation repurchasing its own stock retired that stock according to State law and issued new stock, the transaction resulted in a taxable gain or loss. Our position was subsequently adopted by the Court of Claims and affirmed by the Supreme Court, which stated (United States v. Anderson, Clayton & Co., supra (350 U.S. 55">350 U.S. at 60)):
The Government urges that the crucial inquiry as to whether the transaction is taxable under the regulation depends for its answer upon whether the required shares are resold or retired and new shares issued; since the shares were not retired, the resale at a price greater than cost results in a taxable gain under § 22(a) of the Code and the applicable regulation. The Government receives comfort for its position in the language of Commissioner v. Batten, Barton, Durstine & Osborn, Inc., 171 F.2d 474">171 F.2d 474, 171 F.2d 474">476, 1969 U.S. Tax Ct. LEXIS 91">*117 and Commissioner v. Landers Corp., 210 F.2d 188">210 F.2d 188, 210 F.2d 188">191. But we do not think formalities should be raised to such an important position. Moreover, the applicable regulation provides that tax consequences depend upon "the real nature of the transaction, which is to be ascertained from all its facts and circumstances," and not upon the sole circumstance that the stock is not retired. When viewed in its entirety, the instant transaction, limited to a wholly intracorporate purpose with no element of speculation or gain envisioned from dealing in its shares, does not constitute dealing by the corporation in its own shares as it might deal in the shares of another corporation within the meaning of the regulation.
52 T.C. 659">*670 See Anderson, Clayton & Co. v. United States, 122 F. Supp. 837">122 F. Supp. 837 (Ct. Cl. 1954), affd. 350 U.S. 55">350 U.S. 55 (1955).
In the instant case we find and hold that petitioner's activities constituted no more than an intracorporate readjustment of its capital structure, resulting in no deductible loss.
We first note that petitioner's purchase of its shares arose out of an option granted in connection with its issuance of previously unissued stock, a transaction which section 39.22(a)-15(a), Regs. 118, 1969 U.S. Tax Ct. LEXIS 91">*118 specifies as nontaxable, as it has a direct affect on a corporation's equity capital. See General Electric Co. v. United States, supra at 947. In addition, the shares were restricted by the agreement under which they were issued to prevent either party from making a speculative profit, and the stock certificates themselves contained a legend restricting their salability. As we pointed out in Timken-Detroit Axle Co., 21 T.C. 769">21 T.C. 769 (1954), stock issued under similar restrictions indicates that the predominant purpose behind the stock's issuance was nonspeculative.
We also note that after the stock was reacquired, there is no indication that it was being held as a speculative investment. As soon as petitioner repurchased the shares it immediately offered them to the public at the prevailing market price for the stated purpose of raising additional capital, not to make a profit on the sale. See 191 F. Supp. 551">Girard Trust Corn Exchange Bank v. United States, supra. In fact on brief, petitioner admits that the stock was immediately resold to avoid "the vagaries of future market action."
Even if petitioner had held the stock for a period of time the result would probably have been the same, for it is 1969 U.S. Tax Ct. LEXIS 91">*119 settled that when treasury stock is issued to the public for the primary purpose of raising additional capital, the sale is still indicative of an intracorporate capital adjustment. Brockman Oil Well Cementing Co., 2 T.C. 168">2 T.C. 168, 2 T.C. 168">173 (1943); Cluett, Peabody & Co., 3 T.C. 169">3 T.C. 169, 3 T.C. 169">176 (1944).
Petitioner points out that it could have engaged in similar transactions with the stock of another corporation, and further points out that no one factor is controlling in determining the "real nature of the transaction." See Penn-Texas Corporation v. United States, 308 F.2d 575">308 F.2d 575, 308 F.2d 575">578 (Ct. Cl. 1962). However, petitioner's activities here in no way resembled those of an investor and speculator in its own shares. Petitioner's speculation was in the stock (and business) of Sosnik and Sosnik, Inc. It used its own shares simply as a medium of exchange in connection with that speculation.
Consequently, we have found and hold that under section 39.22 (a)-15, Regs. 118, petitioner did not "deal in its shares as it might in the shares of another corporation." As the court pointed out in 191 F. Supp. 551">Girard Trust Corn Exchange Bank v. United States, supra at 556:
The distinction between extracorporate and intracorporate purpose 1969 U.S. Tax Ct. LEXIS 91">*120 is not clear. However, it would be fair to say that a transaction of an extracorporate 52 T.C. 659">*671 nature is one that cannot be directly traced to the internal affairs of the corporation. Rather, it is something that the corporation does that any individual might himself do to realize a material gain outside of his own business or profession. It is readily discernible here that plaintiff acquired these shares [in the instant case, gave the option] for a wholly intracorporate purpose, i.e., the merger. [In the instant case, the acquisition of Sosnik and Sosnik, Inc.] Perhaps if plaintiff had held these shares for a longer period of time with the thought of realizing a gain, rather than disposing of them almost immediately, a different result would be reached.
Petitioner alternatively contends that though in form it was acquiring and selling its own shares, in substance its transactions amounted to no more than a "Loss upon a Guaranty" of its stock's value. We give short shrift to this argument, as there is no evidence in the record which indicates that either petitioner or the Sosniks ever intended that petitioner was to be a simple guarantor. As respondent points out, if petitioner were 1969 U.S. Tax Ct. LEXIS 91">*121 a guarantor, it would not have been able to demand its stock in return for cash paid out, as it did in the instant case. Also, if petitioner were only a guarantor, the Sosniks would have been required to find a purchaser for Thalhimer's shares before petitioner was liable for any amount, and such was not the case here.
Thus, we find and hold that in neither form nor substance did petitioner enter into, or suffer a loss arising out of, a guarantor's relationship.
To reflect the concessions of the parties,
Decision will be entered under Rule 50.
Footnotes
1. The 5-cent difference between the total of this column and the amount paid the Sosniks is unexplained.↩
2. Stipulated figures; the discrepancies are not explained.↩
3. SEC. 1032. EXCHANGE OF STOCK FOR PROPERTY.
(a) Nonrecognition of Gain or Loss. -- No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation.