Opinion
Docket No. 30930.
1953-12-23
THE GEO. W. ULTCH LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Reece A. Gardner, Esq., and G. Lee Burns, Esq., for the petitioner. William B. Springer, Esq., for the respondent.
Reece A. Gardner, Esq., and G. Lee Burns, Esq., for the petitioner. William B. Springer, Esq., for the respondent.
1. Prior to March 1, 1913, petitioner made four separate distributions to stockholders. Held: (1) That the distribution of its common on common stock was a dividend which is not includible in equity invested capital as a distribution in stock which comes within section 718(a)(3)(A), Internal Revenue Code. Owensboro Wagon Co., 18 T.C. 1107, followed. (2) That each of three other distributions in stock are includible in equity invested capital under section 718(a)(3)(A) since such distributions in stock represented distributions of earnings and profits; on the facts Owensboro Wagon Co., supra, distinguished. (3) On December 31, 1941, petitioner's stockholders each surrendered to petitioner the same proportionate part of his stock holding, gratis, so that each had the same interest in petitioner after the surrender as before. The surrendered stock was not canceled. Held, that the proportionate surrender of stock to petitioner did not bring about any increase in equity invested capital within the meaning of section 718(a).
2. Upon the facts, held, that any income and excess profits tax deficiency for 1944 determined under Rule 50 is properly to be accrued against and subtracted from petitioner's accumulated earnings and profits as of the beginning of 1945. Stern Brothers & Co., 16 T.C. 295, followed.
The Commissioner determined deficiencies in the petitioner's excess profits tax for the years 1944 and 1945, in the amounts of $5,019.05 and $3,108.43, respectively. The deficiencies result principally from adjustments made by the Commissioner decreasing the amount of the petitioner's equity invested capital for each of the taxable years. The petitioner concedes that some adjustments are correct.
The issues for decision are:
(1) Whether petitioner is entitled to include in equity invested capital under section 718, Internal Revenue Code, as money or property paid in for stock, or as distributions in stock, the sum of $55,065.35, or any part thereof, representing the par value of stock issued prior to March 1, 1913.
(2) Whether petitioner's equity invested capital was increased in 1941 when its stockholders turned back to petitioner, gratis, shares of stock in proportion to the total stock held by each.
(3) Whether respondent erred in computing the petitioner's accumulated earnings and profits as of the beginning of 1945 by accruing against and subtracting from the same the deficiency in excess profits tax liability involved herein for the year 1944.
(4) Whether the petitioner is entitled to any unused excess profits credit for the year 1944.
All of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are found as facts and the stipulation is incorporated herein by this reference.
Petitioner is a corporation organized under the laws of the State of Kansas with its principal office in Kansas City, Missouri. It keeps its book and files its income and excess profits tax returns on the basis of the calendar year and upon the accrual method of accounting. The returns for the periods here involved were filed with the collector for the district of Kansas at Wichita, Kansas.
Petitioner was organized on May 7, 1906, with an authorized capital of $100,000 represented by 1,000 shares of common stock, par value $100 per share. Prior to January 25, 1908, petitioner had issued and there were then outstanding 899 shares of its capital stock for which there had been paid into petitioner cash and property in the aggregate amount of $89,900.
On January 25, 1908, at a meeting of petitioner's board of directors at which were present Geo. W. Ultch, J. W. Stevens, I. H. Gnagy, and C. L. Schooley, the following resolution was adopted:
It was then decided to issue stock against the undivided profits for 1906 up to the full amount of the authorized capital of One hundred thousand dollars and to carry the balance on the books as undivided profits and also to not declare any dividends or issue any stock against the profits for 1907 until after the action of the State Charter Board increasing the authorized capital to Two Hundred Thousand Dollars and to call a special meeting at a later date to dispose of said profits as may be then decided by the board of directors.
On January 25, 1908, 93 shares of petitioner's stock were issued to George W. Ultch and 8 shares were issued to J. W. Stevens. The number of shares owned by each shareholder of petitioner immediately prior to the meeting of the board of directors on January 25, 1908, and the shareholdings of each after the issuance of the 101 shares on January 25, 1908, were as follows:
+-------------------------------------------+ ¦Shareholder ¦Old shares¦New shares¦Total¦ +---------------+----------+----------+-----¦ ¦George W. Ultch¦817 ¦93 ¦910 ¦ +---------------+----------+----------+-----¦ ¦J.W. Stevens ¦55 ¦8 ¦63 ¦ +---------------+----------+----------+-----¦ ¦C.L. Schooley ¦5 ¦ ¦5 ¦ +---------------+----------+----------+-----¦ ¦I.H. Gnagy ¦10 ¦ ¦10 ¦ +---------------+----------+----------+-----¦ ¦E.T. Mitchell ¦12 ¦ ¦12 ¦ +---------------+----------+----------+-----¦ ¦Totals ¦899 ¦101 ¦1,000¦ +-------------------------------------------+
On February 11, 1908, the authorized capital of petitioner was increased from $100,000 to $150,000, represented by 1,500 shares of common stock, par value $100 per share.
On May 14, 1908, at a special meeting of the board of directors of petitioner at which all of the directors were present the following resolution was adopted unanimously:
RESOLVED that the earned profits and surplus of this company for the year 1906 and also for the year 1907 be apportioned to the stockholders for said years in proportion to their several holdings for each year; that the share falling to C. L. Schooley, computed in the sum of $507.53, be credited to him on the books of the company subject to his disposal; and that new shares of stock be issued to all stockholders other than said Schooley for their respective proportions, and as the same will result in fractional shares, the stock-holders pay in in cash the several sums shown below and shares of stock then be issued to them each as follows:
+--------------------------------------------+ ¦ ¦ ¦Additional stock ¦ +---------------+---------+------------------¦ ¦Name ¦Pay in ¦issued ¦ +---------------+---------+------------------¦ ¦George W. Ultch¦$4,469.64¦$23,300 ¦ +---------------+---------+------------------¦ ¦J. W. Stevens ¦34.19 ¦1,100 ¦ +---------------+---------+------------------¦ ¦I. H. Gnagy ¦30.82 ¦200 ¦ +--------------------------------------------+
And that upon the adoption of this resolution the officers of the company be thus authorized to carry out the same, it being understood that Mr. E. T. Mitchell not being a stock-holder during the years 1906 and 1907, is not entitled to any share of said distributed surplus.
The action taken at the meeting was expressly ratified by all of the stockholders, who were all of the directors.
Petitioner credited $507.53 to the account of C. L. Schooley subject to his disposal, and on May 14, 1908, petitioner issued 246 shares of its capital stock to the persons and in the amounts set opposite their respective names and (in addition to the amounts, if any, which might be determined in this proceeding to be includible in petitioner's invested capital as a result of the dividend covered by the resolution of May 14, 1908) there was paid into petitioner cash in the amounts referred to below:
+-----------------------------------------+ ¦ ¦Shares ¦Amount of cash ¦ +---------------+--------+----------------¦ ¦Name ¦issued ¦paid in ¦ +---------------+--------+----------------¦ ¦George W. Ultch¦233 ¦$4,469.64 ¦ +---------------+--------+----------------¦ ¦J.W. Stevens ¦11 ¦34.19 ¦ +---------------+--------+----------------¦ ¦I.H. Gnagy ¦2 ¦30.82 ¦ +---------------+--------+----------------¦ ¦Totals ¦246 ¦$4,534.65 ¦ +-----------------------------------------+
Thereafter the 1,246 shares of outstanding stock of petitioner were held as follows:
+-----------------------------+ ¦George W. Ultch ¦1,143 shares¦ +----------------+------------¦ ¦J.W. Stevens ¦74 shares ¦ +----------------+------------¦ ¦C.L. Schooley ¦5 shares ¦ +----------------+------------¦ ¦I.H. Gnagy ¦12 shares ¦ +----------------+------------¦ ¦E.T. Mitchell ¦12 shares ¦ +-----------------------------+
On January 23, 1909, at an annual meeting of the board of directors of petitioner at which all the directors were present personally except E. T. Mitchell, the following resolution was adopted:
Thereupon on motion duly seconded and unanimously carried, it was ordered that a dividend of 16 per cent be declared and paid and the balance of the net earnings be carried on the books as undivided profit; there being now outstanding 1246 shares of stock, it was ordered that this dividend be proportioned among the several stockholders in proportion to their holdings, and said dividend disposed of as follows:
100 shares new stock to be issued to George W. Ultch at $100.00 per share and the sum of $8288.00 to be credited to his special account; eleven shares of new stock at $100.00 per share to be issued to J. W. Stevens, and the sum of $84.00 to be paid to him; $80.00 in cash to be paid to C. L. Schooley; $192.00 to be paid to I. H. Gnagy; $192.00 to be paid to E. T. Mitchell; being in all the sum of $19,936.00.
The minuted were signed by all of the stockholders including E. T. Mitchell.
On January 23, 1909, petitioner issued 111 shares of its capital stock. The persons to whom said shares were issued, the number of shares issued to each and the amounts paid in cash to or credited to the accounts of the several shareholders were as follows:
+--------------------------------------+ ¦ ¦ ¦Amount paid ¦ +---------------+--------+-------------¦ ¦ ¦ ¦in cash or ¦ +---------------+--------+-------------¦ ¦ ¦Shares ¦credited to ¦ +---------------+--------+-------------¦ ¦Name ¦issued ¦account ¦ +---------------+--------+-------------¦ ¦George W. Ultch¦100 ¦$8,288 ¦ +---------------+--------+-------------¦ ¦J. W. Stevens ¦11 ¦84 ¦ +---------------+--------+-------------¦ ¦C. L. Schooley ¦0 ¦80 ¦ +---------------+--------+-------------¦ ¦I. H. Gnagy ¦0 ¦192 ¦ +---------------+--------+-------------¦ ¦E. T. Mitchell ¦0 ¦192 ¦ +--------------------------------------+
Thereafter the 1,357 shares of the outstanding stock of petitioner were held by the following persons:
+-----------------------------+ ¦George W. Ultch ¦1,243 shares¦ +----------------+------------¦ ¦J. W. Stevens ¦85 shares ¦ +----------------+------------¦ ¦C. L. Schooley ¦5 shares ¦ +----------------+------------¦ ¦I. H. Gnagy ¦12 shares ¦ +----------------+------------¦ ¦E. T. Mitchell ¦12 shares ¦ +-----------------------------+
On January 11, 1910, at an annual meeting of the board of directors of petitioner at which all of the directors were personally present, the following resolution was adopted:
Thereupon a motion duly seconded and unanimously carried, it was ordered that a dividend of 20% be declared and paid and the balance of the net earnings be carried on the book as undivided profit.
There being now outstanding 1357 shares of stock. It was ordered that this dividend be proportioned among the several stockholders in proportion to their holdings and said dividend to be disposed of as follows:
123 shares new stock to be issued to Geo. W. Ultch at $100.00 per share and the sum of $12360.00 to be credited to his special account.
15 shares new stock to be issued to J. W. Stevens at $100.00 per share and the sum of $200.00 to be paid to him in cash.
$240.00 in cash to be paid to I. H. Gnagy.
$240.00 in cash to be paid to E. T. Mitchell.
$100.00 in cash to be paid to C. L. Schooley.
Being in all $26940.00.
The minutes were signed by all of the stockholders.
On January 11, 1910, petitioner issued 138 shares of its capital stock. The persons to whom said shares were issued, the number of shares issued to each and the amounts paid in cash to or credited to the accounts of the several stockholders were as follows:
+------------------------------------------+ ¦ ¦ ¦Paid in cash or ¦ +---------------+--------+-----------------¦ ¦ ¦Shares ¦credited to ¦ +---------------+--------+-----------------¦ ¦Name ¦issued ¦account ¦ +---------------+--------+-----------------¦ ¦George W. Ultch¦123 ¦$12,360 ¦ +---------------+--------+-----------------¦ ¦J. W. Stevens ¦15 ¦200 ¦ +---------------+--------+-----------------¦ ¦C. L. Schooley ¦0 ¦100 ¦ +---------------+--------+-----------------¦ ¦I. H. Gnagy ¦0 ¦240 ¦ +---------------+--------+-----------------¦ ¦E. T. Mitchell ¦0 ¦240 ¦ +------------------------------------------+
Giving effect to the 138 shares so issued, the 1,495 shares of the stock then outstanding were held as follows:
+-----------------------------+ ¦George W. Ultch ¦1,366 shares¦ +----------------+------------¦ ¦J. W. Stevens ¦100 shares ¦ +----------------+------------¦ ¦C. L. Schooley ¦5 shares ¦ +----------------+------------¦ ¦I. H. Gnagy ¦12 shares ¦ +----------------+------------¦ ¦E. T. Mitchell ¦12 shares ¦ +-----------------------------+
The percentages of the total shares outstanding immediately prior to January 25, 1908, and immediately after the issuance of the shares mentioned hereinabove on January 25, 1908, May 14, 1908, January 23, 1909, and January 11, 1910, were as follows:
+------------------------------------------------------------+ ¦ ¦Prior to¦ ¦ ¦ ¦ ¦ +---------------+--------+--------+--------+--------+--------¦ ¦Name ¦January ¦January ¦May 14, ¦January ¦January ¦ +---------------+--------+--------+--------+--------+--------¦ ¦ ¦25, 1908¦25, 1908¦1908 ¦23, 1909¦11, 1910¦ +---------------+--------+--------+--------+--------+--------¦ ¦George W. Ultch¦90.8788%¦91.00% ¦91.7335%¦91.5991%¦91.3712%¦ +---------------+--------+--------+--------+--------+--------¦ ¦J. W. Stevens ¦6.1179 ¦6.30 ¦5.9390 ¦6.2638 ¦6.6890 ¦ +---------------+--------+--------+--------+--------+--------¦ ¦C. L. Schooley ¦.5562 ¦.50 ¦.4013 ¦.3685 ¦.3344 ¦ +---------------+--------+--------+--------+--------+--------¦ ¦I. H. Gnagy ¦1.1123 ¦1.00 ¦.9631 ¦.8843 ¦.8027 ¦ +---------------+--------+--------+--------+--------+--------¦ ¦E. T. Mitchell ¦1.3348 ¦1.20 ¦.9631 ¦.8843 ¦.8027 ¦ +------------------------------------------------------------+
On December 31, 1941, petitioner held in its treasury 297 shares of its stock and the remaining 1,203 shares of its issued and outstanding stock were held by the following persons:
+----------------------------+ ¦Mrs. Ada Ultch ¦1 ¦share ¦ +-----------------+---+------¦ ¦Jerrene E. Ultch ¦412¦shares¦ +-----------------+---+------¦ ¦G. W. Ultch, Jr ¦412¦shares¦ +-----------------+---+------¦ ¦William H. Ultch ¦377¦shares¦ +-----------------+---+------¦ ¦A. R. Elwell ¦1 ¦share ¦ +----------------------------+
On that date Jerrene E. Ultch, G. W. Ultch, Jr., and William H. Ultch each transferred to petitioner without consideration shares of its stock in the respective amounts of 145 shares, 145 shares, and 132 shares, or a total of 422 shares. The aggregate adjusted basis of said shares in the hands of said shareholders was $42,200.
In its excess profits tax returns filed by petitioner for the calendar years 1944 and 1945 it claimed excess profits credit based upon invested capital of $149,863.65 and $177,377.60, respectively, determined as follows:
+-----------------------------------------------------------------------------+ ¦ ¦1944 ¦1945 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Money paid in for stock, or as paid-in surplus, or as¦ ¦ ¦ +-----------------------------------------------------+-----------+-----------¦ ¦a contribution to property ¦$7,100.00 ¦$7,100.00 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Property paid in for stock, or as paid-in surplus, or¦ ¦ ¦ +-----------------------------------------------------+-----------+-----------¦ ¦as a contribution to capital ¦123,800.00 ¦123,800.00 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Distributions of earnings and profits in stock of the¦ ¦ ¦ +-----------------------------------------------------+-----------+-----------¦ ¦corporation ¦61,300.00 ¦61,300.00 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Accumulated earnings and profits ¦4,873.00 ¦23,030.46 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Average borrowed invested capital ¦15,499.55 ¦16,939.17 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Total ¦$212,572.55¦$232,169.63¦ +-----------------------------------------------------+-----------+-----------¦ ¦Less reduction on account of inadmissible assets ¦62,708.90 ¦54,792.03 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Invested capital ¦$149,863.65¦$177,377.60¦ +-----------------------------------------------------------------------------+
The invested capital as determined in the statutory notice for 1944 in the amount of $111,298.72 is computed as follows:
+-----------------------------------------------------------------------------+ ¦Money paid in for stock, or as paid-in surplus, or as a ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦contribution to capital ¦$13,334.65 ¦ +-----------------------------------------------------------------+-----------¦ ¦(Increased by $6,234.65 included erroneously in the $61,300 shown¦ ¦ ¦on the return as distributions of earnings and profits in stock ¦ ¦ ¦of the corporation.) ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Property paid in for stock, or as paid-in surplus, or as a ¦81,600.00 ¦ ¦contribution to capital ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦($42,200 in stock transferred to petitioner on December 31, 1941,¦ ¦ ¦eliminated from property paid in for stock, or as paid-in ¦ ¦ ¦surplus, or as a contribution to capital.) ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Distribution of earnings and profits in stock of the corporation ¦0 ¦ +-----------------------------------------------------------------+-----------¦ ¦(Eliminated $61,300 shown on return as distributions of earnings ¦ ¦ ¦and profits in stock of the corporation.) ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Accumulated earnings and profits ¦17,677.96 ¦ +-----------------------------------------------------------------+-----------¦ ¦(Eliminated credit of $42,041.64 to accumulated earnings and ¦ ¦ ¦profits on account of stock transferred to petitioner on December¦ ¦ ¦31, 1941. Decrease of $218.75 in accumulated earnings and profits¦ ¦ ¦due to capital stock tax adjustment. Increase in accumulated ¦ ¦ ¦earnings and profits in amount of $55,065.35 on account of ¦ ¦ ¦reversal of claimed distributions of earnings and profits in ¦ ¦ ¦stock of the corporation.) ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Average borrowed invested capital ¦15,499.55 ¦ +-----------------------------------------------------------------+-----------¦ ¦Reduction on account of inadmissible assets ¦(16,813.44)¦ +-----------------------------------------------------------------+-----------¦ ¦(Reduction on account of inadmissible assets per return, ¦ ¦ ¦$62,708.90, decreased by $45,895.46.) ¦ ¦ +-----------------------------------------------------------------------------+
Respondent determined that the sum of $55,065.35, representing capital stock of petitioner distributed by it to its stockholders on January 25, 1908, May 14, 1908, January 23, 1909, and January 11, 1910, is not includible in petitioner's invested capital. Respondent determined that no part of the $42,200 in stock transferred to petitioner on December 31, 1941, could be included in petitioner's invested capital. Petitioner included no new capital in invested capital on its returns and respondent in his determination did not include any new capital in invested capital. On its return for 1944 petitioner claimed an unused excess profits credit adjustment of $2,476.31. Respondent allowed no unused excess profits credit adjustment for 1944. Respondent determined that in computing accumulated earnings and profits as of the beginning of 1945 the deficiency in controversy herein for the year 1944 should be subtracted.
To the extent, if any, that the $42,200 in stock transferred to petitioner on December 31, 1941, is determined in this proceeding to be includible in invested capital as paid-in surplus, or as a contribution to capital, it is an inadmissible asset.
Upon the evidence it is found that the dividend declarations of May 18, 1908, January 23, 1909, and January 11, 1910, were cash dividends.
OPINION.
HARRON, Judge:
Issue 1. Stockholders of petitioner received additional shares of stock on January 25, 1908, May 14, 1908, January 23, 1909, and January 11, 1910, in the aggregate amount of $55,065.35 ($59,600 less $4,534.65). Petitioner included the above amount in its invested capital in its excess profits tax returns for 1944 and 1945, as ‘Distributions of earnings and profits in stock of the corporation.‘ Respondent excluded the entire sum from invested capital and petitioner challenges that determination. Under this issue, four issuances of stock are involved. The issue presents the question in each instance of the issuance of stock whether there was a distribution in stock of earnings and profits which is includible in invested capital within the provisions of section 718, Internal Revenue Code. The pertinent parts of section 718 are set forth in the margin.
SEC. 718. EQUITY INVESTED CAPITAL.(a) DEFINITION.— The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts reduced as provided in subsection (b)—(1) MONEY PAID IN.— Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital;(2) PROPERTY PAID IN.— Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. If the property was disposed of before such taxable year, such basis shall be determined under the law applicable to the year of disposition, but without regard to the value of the property as of March 1, 1913. If the property was disposed of before March 1, 1913, its basis shall be considered to be its fair market value at the time paid in. If the unadjusted basis of the property is a substituted basis, such basis shall be adjusted, with respect to the period before the property was paid in by an amount equal to the adjustments proper under section 115(1) for determining earnings and profits:(3) DISTRIBUTIONS IN STOCK.— Distributions in stock—(A) Made prior to such taxable year to the extent to which they are considered distributions of earnings and profits; and(B) Previously made during such taxable year to the extent to which they are considered distributions of earnings and profits other than earnings and profits of such taxable year;(4) EARNINGS AND PROFITS AT BEGINNING OF YEAR.— The accumulated earnings and profits as of the beginning of such taxable year;(c) RULES FOR APPLICATION OF SUBSECTIONS (A) AND (B).— For the purposes of subsections (a) and (b)—(1) DISTRIBUTIONS TO SHAREHOLDERS.— The term ‘distribution‘ means a distribution by a corporation to its shareholders, and the term ‘distribution in stock‘ means a distribution by a corporation in its stock or rights to acquire its stock. To the extent that a distribution in stock is not considered a distribution of earnings and profits it shall not be considered a distribution. A distribution in stock shall not be regarded as money or property paid in for stock, or as paid-in surplus, or as a contribution to capital.
Petitioner's first argument is as follows: ‘All of the stock which is in controversy herein was issued prior to March 1, 1913 and even if it be considered that the stock so issued constituted stock dividends and earnings and profits capitalized thereby became paid-in capital and as such are includible in petitioner's invested capital.‘ We reject this argument on the authority of Owensboro Wagon Co., 18 T.C. 1107, 1110, 1111, 1112 (on appeal, C.A. 6); and Prosper Shevenell & Son, Inc., 5 T.C. 88, 91.
We next consider the first of the series of pre-March 1, 1913, issuances of stock, that of January 25, 1908. Petitioner admits that this issuance was a stock dividend of common on common stock. We held in Owensboro Wagon Co., supra, that pre-March 1, 1913, dividends of common stock on common stock are not includible in equity invested capital under section 718(a)(3). The facts here are indistinguishable from the facts in the Owensboro Wagon Co. case, and for the reasons there stated, it is held that the par value of the stock issued on January 25, 1908, is not includible in equity invested capital under subsection (a)(3)(A).
Equity invested capital is a statutory concept. Valdosta Grocery Co., 2 B.T.A. 727; Minneapolis Sash & Door Co., 2 B.T.A. 505. In Owensboro Wagon Co., supra, we said (p. 1109):
It is apparent that under the statutory method prescribed by Congress for computing equity invested capital of a corporation, a distribution of stock is includible only to the extent that it is considered a distribution of earnings and profits. * * *
This is true in the instance of pre-March 1, 1913, distributions. A pre-March 1, 1913, distribution in stock is not to be considered a distribution of earnings and profits within section 718(a)(3) unless the stock dividend would have been taxable in the hands of the distributee as income to him within the meaning of the sixteenth amendment to the Constitution. Owensboro Wagon Co., supra.
The other three issuances of stock in May 1908, January 1909, and January 1910 stand in a different position. We agree with the petitioner that the resolutions authorizing these three distributions must be construed as authorizing the payment of cash dividends. It follows that, in effect, each issuance of stock represented purchases by the stockholders with the proceeds of dividends, i.e., the dividends were reinvested in the corporation through the issuances of stock.
The three latter dividend declarations were not in terms of stock. The declarations created an indebtedness of the corporation to the stockholders and the subsequent disposition of the dividends did not alter the stockholders' right to have payment of the indebtedness. See Bacon-McMillan Veneer Co., 20 B.T.A. 556. In this proceeding, each dividend was declared in a definite amount. Cash was paid to one or more of the shareholders, and in some instances the full amount of the dividend was paid in cash. In such circumstances, we have held that even though some shareholders accept stock in satisfaction of their dividend it cannot constitute a nontaxable stock dividend. Harry Makransky, 35 B.T.A. 395; Lester Lumber Co., 14 T.C. 255. A corporation cannot discriminate among stockholders in the distribution of profits. If one stockholder has the right to receive his share of the profits in cash, all of the stockholders have the same right, and the dividend distribution is regarded as a cash dividend. This is true even though some stockholders accept stock in satisfaction of their shares of a dividend.
Each of the dividend resolutions of May 14, 1908, January 23, 1909, and January 11, 1910, expressly provided for the manner in which the dividend therein declared was to be paid. Each of the resolutions provided that the share of at least one of the stockholders in the dividend distribution was to be paid to him in cash or credited to him on the books of the company subject to his disposal, which was done. We must therefore conclude that all of the stockholders had the right to receive their share of each of the aforementioned distributions of profits in cash or unrestricted credits on the company books, and that the dividend distributions must be regarded as cash dividends. To the extent that any stockholder was issued stock in payment of all or a part of his pro rata share of each dividend, the transaction constituted a purchase of stock by the stockholder. See F. Brody & Sons Co., 11 T.C. 298.
It is held that the amounts in controversy with respect to the stock issued by the petitioner on May 14, 1908, January 23, 1909, and January 11, 1910, are includible in the petitioner's equity invested capital for the years 1941 to 1945, inclusive, as money paid in for stock within the meaning of section 718(a)(1) of the Code.
Issue 2. On December 31, 1941, petitioner had outstanding 1,201 shares of capital stock which were held by three stockholders (two qualifying shares excepted). Each of the three stockholders turned in to the corporation, gratis, 35 per cent of his stock on December 31, 1941. The total number of shares returned to the corporation was 422 shares. The question under this issue is whether, because of the above facts, the petitioner is entitled to increase its equity invested capital by the amount of the adjusted basis (in the hands of the stockholders) of the 422 shares of stock.
When the three stockholders turned in proportional amounts of their respective stockholdings, their respective interests in the petitioner remained the same as before. Also, the capital of the corporation remained the same, i.e., reduction in the number of shares held by each stockholder did not bring about any increase or decrease in capital on December 31, 1941. Stock certificates are merely indicia of the interests owned by stockholders. Reduction on a proportional basis of the number of shares owned by each stockholder did not reduce the interest of each in petitioner's assets.
The petitioner's theory is unsound. Petitioner cites no authorities to support its theory, and we can find none. The fallacy of the contention is made evident by the following: The petitioner is entitled to a credit based upon its actual capital. If petitioner's theory were to be approved, there would be a ‘padding‘ or doubling of part of the equity invested capital, for the purpose of the credit, because the capital represented by the 422 shares of stock was already reflected in petitioner's capital on December 31, 1941, before the stock was turned back to petitioner on a proportionate basis. The turning back of the 422 shares of stock on a proportionate basis neither increased nor decreased petitioner's invested capital.
Under this issue, it is again appropriate to note that ‘equity invested capital‘ is a statutory concept. Congress defined the term in section 718. ‘The general purpose of the provision is to arrive at an amount which has a direct relation to capital employed in the business. * * * Congress having defined the terms, only such amounts as are expressly provided for may be included.‘ Owensboro Wagon Co., supra, p. 1108.
It is held that the turning back by the stockholders of the 422 shares of stock did not bring about any increase in the capital of the petitioner, within the meaning of section 718(a) and that the basis of the stock is not includible in equity invested capital.
Issue 3. The third issue is whether the respondent erred in computing the petitioner's accumulated earnings and profits as of the beginning of 1945 by accruing against the same the deficiency in excess profits tax liability involved herein for the year 1944.
This Court has previously held that, in determining the accumulated earnings and profits of an accrued basis taxpayer for the purpose of determining its excess profits credit, any income and excess profits tax deficiency for the preceding taxable year, to the extent determined under a Rule 50 computation, shall be accrued against and subtracted from the taxpayer's accumulated earnings and profits as of the beginning of the succeeding taxable year. Stern Brothers & Co., 16 T.C. 295, 323. Therefore, under a Rule 50 computation, in accordance with the holdings under the issues, if there is a deficiency in the petitioner's excess profits tax liability for the year 1944, and if the petitioner has any accumulated earnings and profits as of the beginning of 1945, the deficiency so determined shall be accrued against, and subtracted from, the accumulated earnings and profits of the petitioner as of the beginning of 1945, for the purpose of determining the petitioner's excess profits tax credit for the year 1945.
Issue 4. The remaining question is whether the petitioner is entitled to any unused excess profits credit for the year 1944. This depends solely upon the Rule 50 recomputation to be made on the basis of our holdings herein.
Decision will be entered under Rule 50.