Opinion
Docket No. 107223.
1944-08-4
GLOBE-NEWS PUBLISHING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George S. Atkinson, Esq., for the petitioner. William G. Ruymann, Esq., for the respondent.
Under plan of recapitalization, old preferred stock of petitioner, on which were dividends in arrears, was exchanged for new preference stock, common stock, and dividend scrip of petitioner, plus cash. Held, under the facts, that ‘dividend scrip‘ is not a taxable dividend, and that petitioner is entitled to a dividends paid credit only to the extent of the cash paid. George S. Atkinson, Esq., for the petitioner. William G. Ruymann, Esq., for the respondent.
The respondent determined a deficiency in income tax against petitioner for the year 1937 in the amount of $10,863.95. The sole issue presented is whether petitioner is entitled to a dividends paid credit on account of issuance to its stockholders of dividend scrip pursuant to a plan of recapitalization.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated. Petitioner is a Delaware corporation, having received its charter under the name of Lindsay-Nunn Publishing Co. in 1929, for the purpose of carrying on a general newspaper publishing business. The change to its present name occurred in 1934. During the times material hereto petitioner's office was in Amarillo, Texas. It filed its corporation income and excess profits tax return for the taxable year with the collector of internal revenue for the second district of Texas, at Dallas.
The original authorized stock of petitioner was 250,000 shares of no par value stock, 100,000 being preference stock and 150,000 being common stock. Prior to 1937 there had been issued and outstanding 40,000 shares of preference stock and 50,000 shares of common stock. The former was called two-dollar dividend series convertible preference stock, and it provided for accumulation of preferred dividends at the rate of $2 per share per annum from March 1, 1929. This stock will hereinafter be referred to as old preferred stock.
Up to and including December 31, 1937, petitioner was in arrears in the payment of dividends on the old preferred stock in the amount of $13.50 per share. The last dividend paid on this stock was in the amount of $18,350.96, and covered the period up to March 1, 1931.
Pursuant to the powers given under its original charter, petitioner's directors, on July 9, 1937, formally adopted a plan of reorganization and recapitalization. It was proposed to reduce the capital structure of the corporation from $2,875,288.80 to $1,000,000, decreasing the total number of authorized shares of stock from 250,000 to 114,008 shares, the stock to consist thereafter of 32,004 shares of 50-cent noncumulative preference capital stock, hereinafter referred to as new preference stock, without par value, and 82,004 shares of common stock, without par value. The proposed plan modified the rights, privileges, and benefits of the old preferred stock.
On September 9, 1937, the majority of the stockholders formally approved the proposed plan. Under the plan the old preferred stock was to be exchanged for an equal amount of new preference stock. In addition each holder of old preferred stock was to receive one share of common stock without par value and dividend scrip of the corporation for an amount equal to $12.50, plus $1 cash.
Dividend scrip was to be issued in multiples of $12.50, the principal amount of which was payable on or before 25 years from the date of issuance, at the option of the petitioner. The scrip called for interest at the rate of 4 percent, to be paid annually. The interest was cumulative and, if not paid when due, was payable on any subsequent interest due date, as the directors of petitioner might determine. Failure to pay the annual interest was not a default and the maturity date of the scrip was not thereby accelerated. The scrip was transferable only on the dividend book of the petitioner and was subordinate to the payment of principal and interest due or to become due on the outstanding bonds of the company and to the sinking fund provided for the payment of such bonds. On the face of the scrip certificate it was stated to have been issued in satisfaction of accrued and accumulated dividends on preferred stock. The scrip was issued only on condition that the recipient thereof turn in his old preferred stock for the new preference stock, pursuant to the plan of reorganization and recapitalization.
On September 13, 1937, the certificate of amendment of Globe-News Publishing Co., which made appropriate changes in the corporation's charter and duly authorized the exchange of old preferred stock for the new preference stock, common stock, and dividend scrip, was filed with the Secretary of State of Delaware. On September 15, 1937, petitioner's president addressed letters to holders of 30,704 of the 32,004 outstanding shares of old preferred stock, in which he stressed the importance of surrendering such stock for the new preference stock pursuant to the plan of reorganization adopted by the majority of stockholders. In these letters there was transmitted to each holder of the old preferred stock $1 representing the cash dividend on each share of such stock, which was paid pursuant to the plan of reorganization. Thirteen hundred shares of the old preferred stock, the difference between 32,004 and 30,704 shares, were actually owned by the corporation, but were shown to be outstanding in the names of nominees. No dividend was paid by petitioner on these 1,300 shares and on or about October 30, 1937, they were retired by petitioner, leaving 30,704 shares of old preferred stock subject to the exchange under the plan. The holders of 25,101 shares of old preferred stock exchanged their shares in 1937 for the following: 25,101 shares of new preference stock, 25,101 shares of common stock, and dividend scrip in the face amount of $313,762.50.
The estate of Wilbur Hawk owned between 4,000 and 4,500 shares of dividend scrip and shortly prior to December 4, 1937, the executors of the estate sold 800 units of the scrip to the Strauss Securities Co., of Chicago, for $3,200, being $4 for each $12.50 unit. In 1938 petitioner bought approximately $20,000 face value of the scrip, and in 1939 it purchased about $10,000 face value of the scrip, paying in both instances about 50 percent of the face value.
The secretary of petitioner notified each of its stockholders that the fair market value of the dividend scrip in 1937 was $4 for each $12.50 unit and that this, added to the $1 in cash, or a total of $5, was taxable at 68.6 percent and nontaxable to the extent of the remainder. This was based on information given petitioner by its auditors.
In its corporation income and excess profits tax return petitioner showed adjusted net income of $92,380.48 and claimed a dividends paid credit of $92,380.48, the result of which was to reflect no income subject to undistributed profits tax for the year 1937. Respondent allowed $29,903.87 of the dividends paid credit so claimed. The amount so allowed represented $30,704, or the $1 cash dividend paid on each outstanding share of old preferred stock, less an adjustment of $800.13, not here in issue. To the extent that the dividends paid credit represented scrip, the credit claimed was disallowed. In his notice of deficiency the respondent explained the disallowance as follows:
The amount of $62,476.61 has not been allowed as a dividends paid credit for the reason that if any part of a distribution (the scrip notes in your case) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation for the period in which the distribution is made, such part shall not be included in computing the basic surtax credit. See section 27(a) (sic) of the Revenue Act of 1936 and appeal of Skenandoa Rayon Corporation, 42 B.T.A. No. 192.
OPINION.
TURNER, Judge:
Petitioner contends that it is ‘entitled to dividends paid credit in the amount of the adjusted net income on the basis of dividends paid to the old preferred stockholders of $1 per share in cash and dividends paid and/or available in Dividend Scrip to the old preferred stockholders under section 27(d) of the Revenue Act of 1936,
or other applicable provisions‘ of that act.
SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.(d) DIVIDENDS IN OBLIGATION OF THE CORPORATION.— If a dividend is paid in obligations of the corporation, the amount of the dividends paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by the corporation, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs.
Respondent claims that the gain or income on the exchange by the preferred stockholders of old preferred stock for new preference stock, plus new common stock, scrip, and cash, pursuant to the plan of reorganization by recapitalization, was not, except to the extent received in cash, taxable to the stockholders within the meaning of section 112(b)(3),
SEC. 112. RECOGNITION OF GAIN OR LOSS.(b) EXCHANGES SOLELY IN KIND.—(3) STOCK FOR STOCK ON REORGANIZATION.— No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
petitioner is not, therefore, entitled to a dividends paid credit with respect to the scrip.
SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.(h) NONTAXABLE DISTRIBUTIONS.— If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.
There is no dispute as to the material facts. Admittedly, there was a reorganization by recapitalization of petitioner. At the time of reorganization there was a dividend arrearage in the amount of $13.50 on each share of old preferred stock. A dividend of $1 in cash was paid on each share to all the holders of the old preferred stock, and the cash dividend so paid has been allowed petitioner as a dividends paid credit. It is agreed that the exchange of old preferred stock for the new preference stock, share for share, plus an equal amount of shares of new common stock as a stock dividend and scrip in the amount of $12.50 per unit to cover the balance of unpaid accumulated dividends on the old preferred stock, was made pursuant to the plan of reorganization as adopted by the stockholders of petitioner. No stockholder received the scrip or new stock unless he turned in his old stock, and the holders of 5,603 shares of preferred stock, not having turned in their shares, received no scrip dividends or new stock, but did receive the $1 cash dividend.
The difference between the parties is in the manner of treating the scrip. Respondent claims that issuance of the scrip did not effect the payment of a taxable dividend, but that the scrip constituted securities given in exchange for stock, in pursuance of the plan of reorganization. Petitioner claims the scrip is an unsecured note in payment of unpaid dividends and contends that it is within the term ‘other property‘ as used in section 112(c)(1);
that, under that section, it is a taxable dividend in the hands of the recipients to the extent of the fair market value of the scrip, and, therefore, petitioner, having turned over such ‘other property‘ to the shareholders in payment of accumulated dividends, is entitled to the dividends paid credit to the extent at least of its adjusted net income for the taxable year, which is considerably less than the aggregate value of the scrip.
SEC. 112. RECOGNITION OF GAIN OR LOSS.(c) GAIN FROM EXCHANGES NOT SOLELY IN KIND.—(1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
Petitioner also claims that the scrip is taxable under section 115.
One fallacy in petitioner's contention lies in its treatment of the scrip as though it were a payment of dividends separate and apart from the reorganization. The issuance of the scrip by petitioner and the receipt of it by the old preferred stockholders was an integral part of the plan of reorganization and should be considered as such, and not as a separate transaction. Cf. Knapp-Monarch Co., 1 T.C. 59; affd., 139 Fed.(2d) 863; Skenandoa Rayon Corporation v. Commissioner, 122 Fed.(2d) 268, affirming 42 B.T.A. 1287; and South Atlantic Steamship Line, 42 B.T.A. 705. In those cases it was pointed out that the right to the dividend arrears was a part of the preferred shares and not a right separate and apart therefrom. Furthermore, the court, in Skenandoa Rayon Corporation v. Commissioner, supra, held that, even though the right to arrears of undeclared dividends be treated as something separate and apart from the stock under which it had accumulated, the exchange would still fall within the scope of section 112(b)(3), supra, of the statute. The court said: ‘The stockholders' rights to dividend arrears, if treated as separate from the stock itself, must certainly be considered as 'securities in a corporation a party to a reorganization’— a curious 'security' to be sure, but nevertheless a 'security.'‘
In further support of its claim that the issuance of the scrip must be recognized as the payment of a taxable dividend, the petitioner argues that the scrip did not constitute securities, and for that reason section 112(b)(3), supra, is not applicable. In making this argument, it classifies the scrip as ‘only an unsecured note and obligation to pay.‘ The contention is, we think, without merit. Securities may take the form of shares of stock, bonds, or notes. Commissioner v. Neustadt's Trust, 131 Fed.(2d) 528 (20-year debenture bonds); Commissioner v. Kolb, 100 Fed.(2d) 920 (10-year debenture); South Atlantic Steamship Line, supra (25-year debenture bonds); Humphreys Manufacturing Co., 45 B.T.A. 114 (stock); Knapp-Monarch Co., supra (stock); Burnham v. Commissioner, 86 Fed.(2d) 776 (notes); Skenandoa Rayon Corporation v. Commissioner, supra (stock); Clarence J. Schoo, 47 B.T.A. 459 (25-year debentures); Karl B. Segall, 38 B.T.A. 43 (debenture notes).
The scrip in the instant case was payable on or before 25 years from the date of issuance, at the option of the petitioner. It called for interest at 4 percent annually, which was cumulative and payable on any subsequent interest payment date, as petitioner's directors might determine. Failure to pay the interest when due did not affect or accelerate the maturity date of the scrip. The scrip was transferable only on the dividend book of the petitioner and was subordinate to the payment of principal and interest due or to become due on the outstanding bonds of the company and to the sinking fund provided for the payment of such bonds. Such being the character of the scrip, the scrip certificates issued evidenced such a continuing interest in the affairs of the petitioner as to constitute them securities within the meaning of section 112(b)(3), supra. See and compare Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462.
The argument of the petitioner that in any event the issuance of the scrip constituted the payment of a taxable dividend within the meaning of section 115, supra, was considered and decided adversely in South Atlantic Steamship Line, supra.
Decision will be entered for the respondent.