Opinion
No. 42891.
November 9, 1936.
Samuel H. Horne, of Washington, D.C. (Earl B. Breeding, of Washington, D.C., on the brief), for plaintiff.
John W. Blalock, 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 the Realty Bond Mortgage Company against the United States. On stipulation of facts and evidence.
Judgment for plaintiff.
The court, upon a stipulation of the facts and the evidence, makes the following special findings of fact:
1. The plaintiff is a corporation organized under the laws of the state of Delaware, with its principal office at Wilmington, Del.
2. Certain shares of plaintiff's original issue of capital stock were subscribed for under agreements whereby the respective subscribers paid a portion of the subscription price in cash and agreed to pay the balance over varying periods of time. The agreements provided that certificates for the stock should be issued upon payment in full of the subscriptions. Certain of such subscribers failed to complete their payments for said stock and their subscriptions became delinquent prior to 1930.
3. At a special meeting of the board of directors of the plaintiff, held on April 30, 1930, it was pointed out that an assessment and call had been duly made upon all the subscribers to the preferred stock of the corporation who were in default in the payment of their respective subscriptions to such preferred stock; that proceedings had been taken under the General Corporation Law of Delaware on said delinquent subscriptions; and that no amount had been collected thereon. Thereupon the following resolution was unanimously adopted:
"Whereas at a meeting of this Board held on the 27th day of May, 1929, a resolution was duly adopted making an assessment and call upon all the subscribers to the Preferred Stock of this corporation who were then in default in the payment of their respective subscriptions to such Preferred Stock, for the balance due thereon, and directing the Secretary to send notice to each of such stockholders of the said assessment and call, and such notice was duly mailed by the Secretary to each of the delinquent subscribers, and
"Whereas at a meeting of this Board held on the 27th day of March 1928, a resolution was duly adopted, authorizing the proper officers of the Corporation to cause the necessary proceedings to be taken under Section 22 of the General Corporation Law of Delaware, to offer the shares of stock of such delinquent Subscribers for sale as in said Section, provided and if no bidder should be had to pay the amount due on any such subscriptions to take the necessary steps provided by the said Section 22 for the forfeiture of the stock so subscribed for and unpaid and for the forfeiture of the amount heretofore paid on such subscriptions to this Corporation, and
"Whereas pursuant to said resolution this Company offered the shares of the following delinquent Stockholders for sale at public sale on April 12, 1929: [Here follows a list of forty stockholders and sundry amounts of preferred stock shares, totaling 977 shares.] and a notice of the time and place of such sale and the sum due on each share, was duly given by advertising for three (3) weeks, successively, once in each week before the sale in a newspaper, namely, "Every Evening", published in the County of New Castle, in the State of Delaware, where this corporation has its place of business, and such notice was mailed by the Treasurer of this Corporation to each of the above named delinquent subscribers at his last known post office address, said notice being sent more than twenty (20) days before sale, and
Whereas there were no bidders for such shares at said sale held on April 12, 1929, and this Corporation commenced an action at law in New Castle County, Delaware, against each of the above named delinquent subscribers to recover said delinquent subscriptions, said actions being docketed on the following dates: [Here follows a list of suits docketed against each of the aforementioned stockholders on April 24, 1929.] and,
"Whereas more than one (1) year has expired from the date of bringing such actions of Law and no amount has been collected by any of said actions.
"Now, therefore, be it resolved, that the shares of Preferred Stock subscribed for by the following named persons, upon which there are delinquent payments due this corporation, for the collection of which said suits were brought, be and are hereby forfeited to this Corporation: [Here follows a list of the stockholders with the number of shares of forfeited preferred stock set opposite the name of each stockholder.] and that the amounts previously paid in by said above named subscribers on said shares of Preferred Stock as shown by the books of this corporation, be and the same are hereby forfeited to this Corporation, and
"Resolved, that the Treasurer of this Corporation is authorized to make the necessary entries in the records of this Corporation, showing that the said subscriptions of the shareholders above named have been forfeited and that the amounts paid in on said subscriptions have been forfeited to this Corporation."
4. The amounts which had been paid in by these subscribers on said shares of preferred stock of the plaintiff, and which were thus forfeited to the plaintiff, aggregated $28,351.89. The plaintiff corporation did not solicit reinstatement of said subscriptions, none of said subscribers requested reinstatement of their subscriptions, and none of said subscriptions was reinstated. Said amount of $28,351.89 was credited on the books of the plaintiff to the respective stock subscription accounts and thereafter was transferred to surplus.
5. On March 15, 1931, the plaintiff filed its income tax return for the calendar year 1930 with the collector of internal revenue of the United States for the district of Delaware, at Wilmington, Del. Plaintiff paid to the said collector of internal revenue income taxes for the calendar year 1930 as follows:
March 15, 1931 .............. $570.00 April 13, 1931 .............. 51.41 June 8, 1931 ................ 621.49 September 9, 1931 ........... 621.49 December 16, 1931 ........... 621.50 _________ $2,485.89
6. On or about May 7, 1932, the plaintiff duly filed its claim for refund for 1930, alleging, in addition to other grounds, that it had erroneously included as gross income $28,351.89 in respect of forfeited subscriptions to capital stock, such transactions being of a capital nature. In a letter from the Commissioner of Internal Revenue, dated January 12, 1933, the said claim for refund was allowed as to $343.15, based on grounds other than those now in issue, and was rejected as to $2,142.74.
The plaintiff, a Delaware corporation, seeks to recover an alleged overpayment of income taxes for the year 1930, in the sum of $2,142.74, with interest. The facts disclose that during the year 1930 subscribers to plaintiff's capital stock, who in previous years had made payments on their subscriptions amounting to $28,351.89, defaulted in meeting remaining payments due; that upon such default the subscription agreements upon which delinquent payments were due, together with the amounts previously paid on such agreements, $28,351.89, were declared forfeited to the plaintiff; and that subsequently, on a date not shown, such amounts, credited on the books of the plaintiff to the respective subscription accounts, were transferred to surplus. The plaintiff in its tax return for the year 1930 included the amount of these payments in gross income and paid the amount of the taxes due thereon.
The sole question presented is whether the amount of these payments constitutes taxable income to plaintiff for the year involved.
The question was considered by the Board of Tax Appeals in an early case. Appeal of Illinois Rural Credit Association, 3 B.T.A. 1178. In that case partial payments had been made by subscribers to the capital stock of the taxpayer, which payments were subsequently forfeited to the taxpayer because of default by subscribers in making payment of balances due on such subscriptions. In speaking of such payments, the Board said: "The payments on account of the stock subscriptions, at the time they were made, were undoubtedly capital payments, being made to provide capital for the corporation, and were in its hands capital receipts as distinguished from income. The fact that payments were made in installments and stock was never issued for such payments, because they were not made to the full amount of the subscriptions, does not alter their character."
This ruling was approved by the Board in the subsequent case of Industrial Loan Investment Co. v. Com'r, 17 B.T.A. 1328, where a similar state of facts was presented. This holding was likewise approved and followed by the Board in the case of Inland Finance Company v. Commissioner, 23 B.T.A. 199, upon facts practically identical with those in the instant case. The Board's decision in this case, upon review, was affirmed by the Circuit Court of Appeals for the Ninth Circuit, 63 F.2d 886, 887. The court in its opinion said: "We are of opinion that the Board correctly determined that the forfeited payments did not constitute `income,' as the term has been defined; namely, gain derived from capital or labor, or from both combined. Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570."
The rule announced by the Board in the cases cited is that enunciated in Fletcher's Cyclopedia Corporations (permanent edition) vol. 11, § 5345, where it is said: "Property or money which represents an investment of the capital stock of a corporation, or of any part thereof, cannot be regarded as surplus profits, and distributed as dividends, irrespective of the financial condition of the corporation. When a person subscribes for or purchases shares of stock in a corporation, and pays a part only of the amount due thereon, and the shares are afterwards forfeited for nonpayment of the balance, the amount paid is not profits, but a part of the capital."
The same rule is laid down in Clark Marshall on Private Corporations, vol. 2, p. 1589, § 520, where it is said: "When a person subscribes for or purchases shares of stock in a corporation, and pays a part only of the amount due thereon, and the shares are afterwards forfeited for nonpayment of the balance, the amount paid is not profits, but a part of the capital, and cannot be divided among the stockholders."
Upon the foregoing authorities it is held that the forfeited payments in this case, amounting to $28,351.89, did not constitute taxable income to the plaintiff, and that the taxes involved were erroneously imposed. The plaintiff is therefore entitled to recover, and judgment in its favor is awarded in the sum of $2,142.74, with interest thereon as provided by law.
It is so ordered.