Opinion
Docket No. 1562.
1944-11-30
HAMILTON ALLPORT AND GILE ALLPORT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Julius C. Bank, C.P.A., for the petitioners. Richard L. Greene, Esq., for the respondent.
The acquisition in 1940 by a corporation of its shares for purpose of retirement is within section 115(i) and (c), Internal Revenue Code, treating the gain to the shareholder as short term capital gain no matter how long shares were held by him and regardless of plan for expansion or nonliquidation of corporate business, since partial liquidation under the statute refers literally to a distribution in cancellation or redemption of a part of the corporate shares. Shareholder's lack of knowledge of corporate intent to retire stock is immaterial. Julius C. Bank, C.P.A., for the petitioners. Richard L. Greene, Esq., for the respondent.
A deficiency of $1,057.11 in income tax for 1940 was determined as the result of several adjustments. The only determination assailed by the taxpayer is that an amount received by him from a corporation for 400 shares of its preferred stock was received in partial liquidation and not in a sale of a capital asset, and that therefore 100 percent of the gain is taxable as a short term gain.
FINDINGS OF FACT.
The petitioners, husband and wife, reside in Chicago, Illinois, where they filed their joint income tax return for 1940. (Hamilton Allport alone will be hereinafter called the petitioner, since Gile Allport is merely party to the proceeding because a joint return was filed.)
Before May 6, 1940, petitioner was the owner of 400 preferred shares of Western Light & Telephone Co., of which the basis to him was $5,750. By its articles of incorporation, article fourth, the corporation was authorized to redeem any part of its preferred shares at a price of $27.50 per share, plus accumulated unpaid dividends, and to purchase such shares from time to time at private or public sale for retirement. The shares could not be reissued and were required to be retired. This authorization appeared upon the petitioner's certificates of stock. Pursuant to this provision, the corporation's board of directors passed resolutions authorizing such purchase and retirement. Pursuant to these resolutions, the corporation in 1939 acquired 1,711 shares and in 1940 6,654 shares, all of which were retired. Among these shares were petitioner's 400 shares, which were acquired by the corporation in May 1940. For these the corporation paid $10,900 to petitioner and then sent the shares to its transfer agent for cancellation, which was accomplished May 31, 1940, and proper record and book entries were made. No transfer tax was paid or stamp affixed in respect of this transaction. None of these 400 shares was carried by the corporation as treasury stock, and none was reissued by the corporation. The authorized preferred capital stock was reduced and a certificate of retirement was filed with the secretary of state.
The gain realized by the petitioner in this sale to the corporation of the 400 shares was $5,150.
OPINION.
STERNHAGEN, Judge:
The Commissioner's determination is based upon the definition of partial liquidation contained in section 115(i) of the Internal Revenue Code
and treats the gain of $5,150 as a short term capital gain as required by section 115(c), providing: ‘Despite the provisions of section 117, the gain so recognized shall be considered as a short-term capital gain, except * * * . ‘ (The exception is irrelevant.) The effect of this was to subject all of the gain to tax. The petitioner assails this and demands, under section 117(b), that the gain be recognized only to the extent of 50 percent because he had held the shares more than 24 months.
As used in this section the term ‘amounts distributed in partial liquidation‘ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.
There is no escape from the Commissioner's application of the statute to the facts. The $10,900 was squarely within the statutory definition of section 115(i) because it was in fact, and indeed in the clear intent of the corporation, in complete cancellation or redemption of part of its stock. This statutory definition is not qualified by the actual or constructive intent of either the corporation or the shareholder, but is absolute within its express terms. It would not matter if the shareholder were entirely without information as to the plan or the authorization or requirement of the corporation in respect of the acquisition of such shares. However, this petitioner was fully advised by the provision on his certificates that such shares could be purchased by the corporation and, if purchased pursuant to the articles of incorporation, must be retired. This requirement had nothing to do with any plan which the corporation might have for an expansion or nonliquidation of its business. The statute applies, not to a distribution in liquidation of the corporation or its business, but to a distribution in cancellation or redemption of a part of its stock. Since this is precisely what the evidence shows, there is no alternative to the recognition of the $10,900 as a distribution in partial liquidation and the application of the short term capital gain provision to 100 percent of the $5,150 gain. Dodd v. Commissioner, 131 Fed.(2d) 382, affirming 46 B.T.A. 7; Hill v. Commissioner, 126 Fed.(2d) 570; Alpers v. Commissioner, 126 Fed.(2d) 58; Cohen Trust v. Commissioner, 121 Fed.(2d) 689; Hammans v. Commissioner, 121 Fed.(2d) 4; L. B. Coley, 45 B.T.A. 405; appeal dismissed.
Decision will be entered for the respondent.