Foster v. United States, (1936)

Full title: FOSTER et al. v. UNITED STATES

Court: United States Court of Federal Claims

Date published: Dec 7, 1936

17 F. Supp. 191 (Fed. Cl. 1936)

Opinion

No. 42642.

December 7, 1936.

Hugh C. Bickford, of Washington, D.C. (C. Clifton Owens, of Washington, D.C. on the brief), for plaintiffs.

George H. Foster, of Washington, D.C. and Robert H. Jackson, Asst. Atty. Gen., for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

Action by Benjamin B. Foster and another, executors of the estate of Anna Foster Ford, deceased, against the United States.

Petition dismissed.

This case having been heard by the Court of Claims, the court, pursuant to the stipulation of the parties, makes the following special findings of fact:

1. Anna Foster Ford, who was originally the plaintiff in this case, died March 30, 1936, and Benjamin B. Foster and Robert R. Todd, executors of her estate, have been substituted as plaintiffs.

2. March 12, 1931, the decedent filed her income tax return for the calendar year 1930 and reported therein a taxable net income of $29,697.29 and a tax liability thereon of $850.28, which she paid at the time of filing the return.

3. The decedent was, on February 11, 1930, the owner of record of 155 shares of a par value of $100 per share of the total of 1,500 shares of the capital stock of the Foster Lumber Company, a Missouri corporation. She acquired this stock prior to March 1, 1913, at a cost less than the March 1, 1913, value, which March 1, 1913, value it is agreed was at least $2,000 per share. The Foster Lumber Company on February 11, 1930, duly declared a cash dividend of 150 per cent. of its capital stock payable on that date to all stockholders of record on that date. The decedent received during the calendar year 1930 the amount of $23,250 from the Foster Lumber Company in payment of the said dividend of February 11, 1930, on the 155 shares of stock owned by her. The entire amount of this dividend of $23,250 received by her during 1930 was included in the individual income tax return filed by her for that year as income and a tax paid thereon.

4. On July 18, 1932, the decedent filed with the collector of internal revenue at Kansas City, Mo., a claim for the refund of $712.01 of the income tax paid by her for the year 1930. This claim was predicated on the basis that of the dividend of $23,250, received by her from the Foster Lumber Company during 1930 and reported as taxable in its entirety, the amount of $14,754.22 was paid out of surplus accumulated or appreciation of land and timber arising before March 1, 1913, and was to that extent and for that reason exempt from tax. The Commissioner of Internal Revenue rejected the said claim for refund on September 21, 1933.

5. The Foster Lumber Company was a Missouri corporation which had issued 2,000 shares of common stock having a par value of $100 each. It was formed for the purpose of manufacturing, buying, and selling lumber, building material, and merchandise generally; also for buying, selling, and leasing lands. On March 1, 1913, the earnings or profits accumulated and increase in value of property owned by the company were in excess of $3,725,000.

6. The following tabulation sets forth with reference to the Foster Lumber Company, in column "A" the period involved, in column "B" the amount of the earnings, or profits for that period, in column "C" the amount of the dividend distributed on the last day of the indicated period, and in column "D" the balance of the earnings or profits accumulated subsequent to February 28, 1913:

=========================================================================================== "A" "B" "C" "D" Balance of Earnings or Profits Earnings or Distributions Accumulated Period Profits Since February 28, 1913 ------------------------------------------------------------------------------------------- Mch. 1, 1913 to Dec. 31, 1913 ............ $54,488.12 none $54,488.12 Jan. 1, 1914 to Feb. 10, 1914 ............ 3,322.90 $100,000.00 none Feb. 10, 1914 to Dec. 31, 1914 ........... 26,998.60 none 26,998.60 Jan. 1, 1915 to Feb. 9, 1915 ............. 21,800.13 100,000.00 none Feb. 9, 1915 to Dec. 31, 1915 ............ 182,226.72 none 182,226.72 Jan. 1, 1916 to Feb. 8, 1916 ............. 38,890.35 200,000.00 21,117.07 Feb. 8, 1916 to Dec. 31, 1916 ............ 335,685.13 none 356,802.20 Jan. 1, 1917 to Feb. 13, 1917 ............ 52,944.91 300,000.00 109,747.11 Feb. 13, 1917 to Mch. 16, 1917 ........... 38,169.59 50,000.00 97,916.70 Mch. 16, 1917 to Dec. 31, 1917 ........... 358,301.60 none 456,218.30 Jan. 1, 1918 to Feb. 12, 1918 ............ 34,852.96 300,000.00 191,071.26 Feb. 12, 1918 to Jun. 22, 1918 ........... 107,878.22 100,000.00 198,949.48 Jun. 22, 1918 to Oct. 2, 1918 ............ 84,64 2.91 80,852.20 202,740.19 Oct. 2, 1918 to Dec. 31, 1918 ............ 75,514.77 none 278,254.96 Jan. 1, 1919 to Feb. 11, 1919 ............ 55,306.55 300,000.00 33,561.51 Feb. 11, 1919 to Dec. 31, 1919 ........... 437,056.62 none 470,618.13 Jan. 1, 1920 to Feb. 10, 1920 ............ 51,764.03 300,000.00 222,382.16 Feb. 10, 1920 to Dec. 31, 1920 ........... 421,876.82 none 644,258.98 Jan. 1, 1921 to Feb. 8, 1921 ............. 3,269.75 200,000.00 447,528.73 Feb. 8, 1921 to Dec. 31, 1921 ............ 28,137.05 none 475,665.78 Jan. 1, 1922 to Feb. 14, 1922 ............ 25,585.23 200,000.00 301,251.01 Feb. 14, 1922 to Dec. 31, 1922 ........... 186,655.92 none 487,906.93 Jan. 1, 1923 to Feb. 13, 1923 ............ 19,938.46 300,000.00 207,845.39 Feb. 13, 1923 to Dec. 31, 1923 ........... 149,306.62 none 357,152.01 Jan. 1, 1924 to Feb. 12, 1924 ............ 20,649.83 200,000.00 177,801.84 Feb. 12, 1924 to Dec. 31, 1924 ........... 159,298.68 none 337,100.52 Jan. 1, 1925 to Feb. 10, 1925 ............ 36,057.51 250,000.00 123,158.03 Feb. 10, 1925 to Dec. 31, 1925 ........... 292,967.27 none 416,125.30 Jan. 1, 1926 to Feb. 9, 1926 ............. 29,521.05 300,000.00 145,646.35 Feb. 9, 1926 to Dec. 31, 1926 ............ 246,765.70 none 392,412.05 Jan. 1, 1927 to Feb. 8, 1927 ............. 25,195.83 300,000.00 117,607.88 Feb. 8, 1927 to Dec. 31, 1927 ............ 216,816.76 none 334,424.64 Jan. 1, 1928 to Feb. 14, 1928 ............ 34,957.28 250,000.00 119,381.92 Feb. 14, 1928 to Dec. 31, 1928 ........... 255,823.73 none 375,205.65 Jan. 1, 1929 to Feb. 12, 1929 ............ 30,587.52 350,000.00 155,793.17 Feb. 12, 1929 to Oct. 10, 1929 ........... 174,785.81 975,000.00 none Oct. 10, 1929 to Dec. 31, 1929 ........... 60,446.75 none In issue Jan. 1, 1930 to Feb. 11, 1930 ............ 22,311.42 225,000.00 In issue Feb. 11, 1930 to Dec. 31, 1930 ........... 176,314.60 none In issue

7. At the time of the declaration and payment by the Foster Lumber Company of the dividend of $100,000 on February 10, 1914, its earnings and profits accumulated subsequent to February 28, 1913, were but $57,811.02.

8. At the time of the declaration and payment by the Foster Lumber Company of the dividend of $100,000 on February 9, 1915, its earnings and profits accumulated subsequent to February 28, 1913, and not distributed were but $48,798.73.

9. The dividends distributed by the Foster Lumber Company from 1916 to, and inclusive of, February 12, 1929, were distributed from earnings and profits accumulated subsequent to February 28, 1913.

10. The capital stock of the Foster Lumber Company has always been owned by members of the Foster family. Three members of the family who had removed to California were stockholders in the corporation, and, in order that they might retire from ownership of and participation in the affairs of the corporation and also that a rearrangement of interests might be effected, it was decided to retire and cancel 500 shares of the company's capital stock. Accordingly, under date of July 20, 1929, the Foster Lumber Company by formal written notice to all of its stockholders requested that each of them notify it if they were in favor of a reduction in the capital stock of the company from $200,000 to $150,000 by the acquisition and cancellation by the company of 500 shares of its outstanding capital stock of 2,000 shares from the therein named stockholders in the proportions and for the amounts set forth in that letter.

11. On October 1, 1929, a meeting of the stockholders of the Foster Lumber Company was held and a resolution adopted providing for the reduction of the capital stock of the company from $200,000 divided into 2,000 shares to $150,000 divided into 1,500 shares, and on October 8, 1929, the company having complied with the laws of the state of Missouri providing for the decrease of capital stock, the Secretary of State certified to the decrease therein to the amount of $150,000.

12. On October 10, 1929, the Foster Lumber Company distributed $1,025,000 in cash to its stockholders for 500 shares of its capital stock retired on that date pursuant to the proceedings above recited. On the books of the corporation, $975,000 of the amount distributed was charged to surplus and $50,000 to the capital stock account. The stock retired was immediately canceled. This distribution was on the basis of $2,050 per share and subsequently it was agreed between the stockholders and the defendant that the value of the stock on March 1, 1913, was $2,050 per share and that no taxable income was determined as arising out of the retirement of the stock in 1929.

13. On February 12, 1929, and immediately after the payment of the cash dividend made on that date in the amount of $250,000, the remaining balance of earnings and profits accumulated by the Foster Lumber Company since February 28, 1913, was $155,793.17. The earnings and profits of that corporation for the period from February 12, 1929, to October 10, 1929, were $174,785.81.

14. The earnings and profits of the Foster Lumber Company on October 10, 1929, prior to the distribution of $1,025,000 on that date, which had been accumulated since February 28, 1913, were $330,578.98.

15. The accumulated earnings or profits of the Foster Lumber Company for the period from October 10, 1929, to February 11, 1930, and prior to the cash distribution of $225,000 on the latter date by that company were $82,758.17.

GREEN, Judge.

The plaintiffs, claiming that the decedent in her lifetime overpaid her taxes for the year 1930, bring this suit to recover the alleged overpayment, being $740.60 together with interest from March 12, 1931. There is no dispute as to the facts.

For the calendar year 1930 the decedent filed a return stating her taxable income to be $29,697.29 and paid the tax thereon. Included in decedent's reported income was the sum of $23,250 received from the Foster Lumber Company as dividends on 155 shares of stock of that company owned by her. This was out of a dividend of $225,000 declared on February 11, 1930.

Plaintiffs claim that $14,754.22 included in the dividend of $23,250 was paid by the company out of surplus accumulated prior to March 1, 1913, and hence was exempt from tax. The Commissioner of Internal Revenue rejected this claim and the decedent, having filed a claim for refund which was also denied, brought this suit.

The Foster Lumber Company was organized in 1896 and up to 1929 its capital stock consisted of 2,000 shares of the par value of $100 per share. On March 1, 1913, its earnings and surplus were in excess of $3,725,000. On October 10, 1929, having determined to retire 500 shares of the capital stock, the company paid in cash to its stockholders $1,025,000 and 500 shares of the stock were surrendered to the company for cancellation. Of this sum $975,000 was charged to surplus and $50,000 was charged to capital stock.

The plaintiffs rely on section 115(b) of the Revenue Act of 1928, 45 Stat. 822 ( 26 U.S.C.A. § 115 and note), which provides that: "For the purposes of this Act [the Revenue Act of 1934] every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits."

It is contended that this provision is controlling here and that consequently the distribution made on October 10, 1929, must be treated as made out of earnings or profits accumulated since February 28, 1913, to the extent thereof. As the amount of such earnings remaining undistributed at that time was only $330,578.98, it is plain that if this rule is applied the distribution would more than absorb all of this amount, leaving nothing to be carried over to the next year.

In the interval from October 10, 1929, to February 11, 1930, when $225,000 was distributed, the corporation accumulated $82,758.17, and plaintiffs claim that this was all which was distributed on the date last mentioned out of earnings and profits accumulated since February 28, 1913. If this is correct, the remainder of the dividend, $142,241.83, was not subject to income tax when it came into the hands of the stockholders and the Commissioner erred in holding to the contrary and in refusing to allow the decedent's claim for a proportionate reduction in her income tax for that year.

The defendant, on the other hand, contends that the distribution made in 1929 constituted an exception to the general rule expressed in section 115(b) and is covered by a provision in section 115(c), 45 Stat. 822 ( 26 U.S.C.A. § 115 note) which reads as follows: "In the case of amounts distributed in partial liquidation * * * the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation."

It will be seen that the ultimate issue between the parties is whether the distribution of 1929 was "properly chargeable to capital account."

In determining the question thus presented the nature of the distribution must first be considered.

Clearly the distribution was not a dividend, either in the special sense that the word is used in the statute as defined in section 115(a), 26 U.S.C.A. § 115(a) and note, or in its meaning as generally used, which is somewhat broader. The definition set out in the statute was evidently inserted to make sure that there could be no claim that a distribution made out of profits was not a dividend. The distinction between a dividend and such a distribution as is made in the case before us is quite plain. When a dividend is made, the stockholder receives something but pays nothing. In the case at bar, the stockholder received money from the corporation but gave what may be considered as full value for what she received. Neither the stockholder nor the corporation had gained by the transaction. We think that, if profits were distributed, as is now claimed by the plaintiffs, the stockholder would not have been required to pay for what she received. What the corporation turned over to the stockholders was the value of their stock which appears to be the same as on March 1, 1913. This is treated by the law as a basis of the determination of gain or loss to the stockholder in the transaction, and we think it is so treated on the ground that earnings or profits accumulated prior to that date constituted for tax purposes the capital of the taxpayer. When the stockholders obtained the March 1, 1913, value of their stock, it was the realization of capital, and was properly chargeable to capital account.

A consideration of the purpose of section 115(c) of the act of 1928 and the reports made by the committees of the House and Senate when it first became a part of the revenue law supports the view above expressed. As the law originally stood, the plan devised in the case before us could be carried out so that the earnings and profits accumulated since 1913 would be distributed tax free. The general provisions of section 115(b), which were in the former act, would have required the distribution to be treated as made out of earnings or profits accumulated after February 28, 1913, and the distribution would be properly chargeable to surplus and paid out of such profits with the result that the distribution made October 10, 1929, absorbed all of the earnings and profits to that date. Obviously this would enable the stockholders to escape taxation although they had received earnings and profits which had accumulated since February 28, 1913. To prevent this avoidance of taxes, what is now section 115(c) of the Revenue Act of 1928 was inserted in the Revenue Act of 1924 as section 201(c), 43 Stat. 254. This new provision stated an exception to section 115(b); namely, a case where the distribution was "properly chargeable to capital account." When the 1924 act was reported, the reports on the bill made by both the Senate and House committees contained the following statement: "The theory of liquidating dividends is extended to distributions in partial liquidation. If a corporation retires a portion of its capital stock, the transaction is treated, from the point of view of the stockholder, as a sale of his stock. If the corporation distributes an amount in partial retirement of its capital stock, the amount thereof is to be considered as a return of capital, and taxable only if, as, and to the extent that it exceeds the basis of the stock." [Italics ours.]

In the case before us, the corporation distributed an amount in partial retirement of its capital stock and, as stated in the report, this is "considered as a return of capital." Money paid out in making a return of capital is "properly chargeable to capital account." It is true that the reports presented the matter "from the point of view of the stockholder," but the principle is the same when applied to the corporation. The distribution came within the provisions of section 115(c), being properly chargeable to capital account, and consequently was not to be considered as a distribution of profits under section 115(b).

If the distribution of 1929 was charged to capital account, as it should be according to what we have held above, the profits which had accrued since 1913 and then on hand would not be depleted thereby. When the 1930 distribution was made, then, under the provisions of section 115(b), it would be paid out of these profits to the extent thereof. When the decedent received her share of these profits, the Commissioner rightly held that she was taxable thereon.

The petition must be dismissed and it is so ordered.