to the date of purchase of said stock by the Company; but in no event shall any such purchase be made at a date later than March 31, 1926, and the President or any Vice-President of this Company is hereby authorized and directed to notify, by mail, all of the preferred stockholders of this Company of record on January 2, 1926, of the effect of these resolutions and the willingness of this Company to purchase said Preferred stock at the price and on terms aforesaid at any time between January 2nd and March 31st, 1926. BE IT FURTHER RESOLVED that all Preferred stock so purchased by this Company, pursuant to these resolutions, be cancelled and retired as fast as purchased and received. As information, Mr. Kelly advised that all of the outstanding bonds of the Companies had been redeemed on December 15th and satisfaction of the Bond Mortgage executed. At the annual meeting of the stockholders of the Consolidated Naval Stores Company held on March 3, 1926, the president of the company made an address which reads as follows: On behalf of the Officers and Directors of the Company I wish to submit herewith the twenty-third annual report of its operations. The unsatisfactory conditions which prevailed in the Naval Stores industry in 1924 were succeeded by a period of profitable prices which were maintained during 1925. It is also gratifying to report that the enormous activity in the land market last year resulted in very large sale by the Company at unprecedented prices for the same classes of property in this State. Attached to and forming a part of this report, are the financial statements which show that the current net earnings of the Company and the subsidiaries wholly owned by it, for the year 1925, were $1,492,773.30, after providing for income taxes and a premium of five per cent. on the preferred stock to be paid on or before April 1st, 1926, when it is redeemed. It is customary to refer to the item of Surplus and Undivided Profits, but before giving the figures, I may state that on account of the large volume of sales by this Company and its subsidiaries, on the installment or deferred payment basis, it was necessary to set up the profits and deferred credit to Surplus accordingly. Such deferred amounts, however, will not become available until the installment payments on land sales have been made and the profits therefrom actually realized. We have, therefore, classified the Surplus and Undivided Profits of this Company and your participation in the Surplus and Undivided Profits of all subsidiary companies, under two headings, namely: Current and Deferred, and the amounts are as follows: Current. Deferred_ $5, 031, 705. 71 5, 279, 002. 58 The Consolidated Land Company's operations for the year show net current profits of $1,164,427.94 and deferred profits of $3,343,270.54. Land sales for the year were 364,837.97 acres. The Florida Industrial Company, in which your Company owns a half interest, likewise enjoyed a prosperous year, the result of which shows its deferred profits are in excess of three million dollars. In the course of the year your Company redeemed and paid in full all of its outstanding bonds, in the principal sum of $2,794,000, although the serial maturities thereof extended over a further period of twelve years. J 1 Your Directors have likewise authorized the call for redemption on April 1st, 1926, of all the Preferred stock of the Company, amounting to $2,475,300.00, and notice to this effect was mailed to all stockholders on January 2nd, and at the same time we gave them the opportunity of surrendering their stock before April 1st and receiving payment therefor at the redemption rate. I may add that more than half of the stockholders have already availed themselves of this privilege. Following the policy established by the Company of converting its properties into cash or its equivalent, we sold in addition to lands and timber during 1925, the Consolidated Building and the Riverside property of the Consolidated Grocery Company; also the Cattle Ranch, which enables us to accomplish the liquidation of the Consolidated Grocery Company and the Kissimmee Island Cattle Company. At a meeting of your Directors, today, a dividend of ten per cent. (10%) was declared, payable on April 15th to the common stockholders of record on April 10th, 1926. The entire issue of the preferred stock of the Consolidated Naval Stores Company was redeemed and retired in 1926 as contemplated by the resolutions adopted by the board of directors on December 16, 1925. At the date of the redemption of the preferred stock the petitioner still owned the 213 shares which had been issued to him as a stock dividend. Upon surrender of his 213 shares of the preferred stock for retirement the petitioner received from the company the amount of $22,365, or $105 per share. After the redemption and retirement of its preferred stock in 1926 the Consolidated Naval Stores Company continued throughout the remainder of that year and during 1927 to conduct an extensive business. The company is still in existence and regularly conducting business. On March 12, 1927, the following letter was received in the office of the internal revenue agent in charge, Jacksonville, Fla.: Dear Sir: As requested in your letter of March 7, 1927, we beg to hand you herewith list of Stockholders who owned and redeemed in 1926 Preferred Stock of this Company, which was issued as a Stock dividend in 1923. The names on this list are those of which the redemption of stock dividend may be considered as equivalent to a cash dividend in 1926. Trusting that the enclosed will give you the information desired, we are, (Signed) CONSOLIDATED NAVAL STORES COMPANY, GCC: B P. S. You will note this is the same information that we are forwarding to the Commissioner of Internal Revenue, Sorting Section, Washington, D. C. The list attached to the foregoing letter was captioned “List of Dividend Payments" and contained the following statements on its first page: I swear (or affirm) that the following is a true and complete report of all payments of redemption of stock dividends made to shareholders receiving amount that may be considered as cash dividends in 1926 as stated below. G. C. CHAPPELL, [Signed] Secretary. Preferred Stock issued as a Stock dividend May 15, 1923, and redeemed in 1926, to Common Stockholders of record on date redeemed, who still own the corresponding shares of Common stock on which they received the Preferred stock as a stock dividend according to our records, which may not, however, be in accordance with the facts. (Redeemed at par value of $100.00 per share plus premium of $5.00 per share.) The list attached to the letter included the name of the petitioner and showed that he had been paid $22,365 for 213 shares of preferred stock which had been redeemed. In his income tax return for 1926 the petitioner treated the income received by him upon the redemption of his 213 shares of preferred stock in the Consolidated Naval Stores Company as capital gain and reported the amount thereof as $2,840.14 with the following explanation: 213 shares Consolidated Naval Stores Co., 7% Preferred Stock Redeemed 1/20/1926 at $105, received as a stock Dividend July 1, 1923Owned common stock prior to March 1, 1913_ Common Stock Value March 1, 1913, per share---. Cost of Preferred, % of $275.00 per share.. 213 Shares at 91.66 per share.. $22, 365.00 $275.00 19, 524. 86 2,840. 14 In determining the deficiency here involved the respondent determined that the amount received by the petitioner upon the redemption of his 213 shares of preferred stock in the Consolidated Naval Stores Company was taxable as a cash dividend and subject to surtax. OPINION. TRAMMELL: The petitioner contends that, as a result of the redemption in 1926 of the 213 shares of preferred stock in the Consolidated Naval Stores Company issued to him in 1923 as a stock dividend, he realized a gain of $5,325, which is taxable as a capital gain, since the stock was held by him for more than two years. The respondent contends that the entire amount of $22,365 received by the petitioner upon redemption of the stock is taxable as a cash dividend. The parties have stipulated that, if we should hold that the income resulting to the petitioner from the transaction is taxable as capital gain, the amount of such income is $5,325, instead of $2,840.14 as reported by him in his return. The respondent contends that under the provisions of section 201 (g) of the Revenue Act of 1926 the entire amount of $22,365 received by the petitioner upon the redemption of his stock is to be treated as a taxable dividend and subject to surtax. Section 201 (g) of the Revenue Act of 1926 provides as follows: If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926. At the time of the stock dividend in 1923 the corporation had earned surplus accumulated since February 28, 1913, sufficient to pay such amount as well as at the time of redemption of such stock in 1926. There is no controversy between the parties as to the shares of the preferred stock in the Consolidated Naval Stores Company received by the petitioner in 1923 being a true stock dividend, nor is there any controversy between the parties respecting the redemption and cancellation by the Consolidated Naval Stores Company of its entire issue of preferred stock in 1926. Accordingly, the question presented for determination is whether the redemption and cancellation by the Consolidated Naval Stores Company of its preferred stock under the circumstances set out in our findings were at such time and in such manner as to make the amounts paid by the company upon such redemption and cancellation essentially equivalent to the distribution of a taxable dividend. In Pearl B. Brown, Executrix, 26 B. T. A. 901, we considered the purpose and the manner of application of this provision of the act, and there said: The ordinary intendment and purpose of the statute is plain enough. A stock dividend being constitutionally free from tax, Eisner v. Macomber, 252 U. S. 189, and a stock redemption being a pro tanto liquidation of investment, the two could easily be used in a common plan so as to circumvent the tax which would be imposed if the distribution were made directly by way of ordinary dividend. To bar such circumvention, the Revenue Act of 1921 taxed the distribution as a dividend whether it was made directly as a dividend or by the more roundabout course, and the subsequent statutes have carried the same provisions with such refinements of expression as were found necessary by experience to fulfill the purpose. Revenue Act of 1921, sec. 201 (d); 1924, sec. 201 (f); 1926, sec. 201 (g); 1928, sec. 115 (g). See H. Rept. 1, 69th Cong., 1st sess., p. 5; S. Rept. 52, 69th Cong., 1st sess. p. 15. While the obvious device, by a close corporation having a surplus, consisting of an expansion of capitalization, a stock issue and stock redemption, all within a short time pursuant to a unified plan, is plainly within the statute (see C. B. VIII-2, p. 133), the flexible language of the provision makes it clear also that its burdens were not to be imposed arbitrarily (see C. B. VI-2 p. 14). As the taxpayer may not, in view of this statute, avoid the tax by an artificial device of empty forms, cf. W. O. Huntoon, 14 B. T. A. 459, so the Government may not, under this statute, impose a tax merely because there has been a stock redemption, where the circumstances are free from artifice and beyond the terms and fair intendment of the provision. Of course, where the language of the statute is specific and inelastic there is no room for avoiding its effect, whatever the inconsistency with the general purpose as disclosed by later enactments, cf. John Stewart Byran, 20 B. T. A. 573; but, generally speaking, the provisions should be treated as special and applied to promote its special purpose (see Alfred A. Laun, 26 B. T. A. 764). When the stock dividend was declared in 1923, the corporation did not have sufficient cash available to pay the dividend in cash. This stock dividend was declared in order to bring the capitalization of the company to a figure which more nearly approximated the value of its assets and to have available to the corporation as capital for its business uses such earnings and profits as it had accumulated. We find nothing in this case to distinguish it from our decision in the Brown case, supra. The fact that an officer of the company in a subsequent year expressed the view that the redemption of the preferred stock was the equivalent of a cash dividend is not material. It is only his opinion, by which we are not bound, and which in fact throws no light upon the case. We must reach our conclusion on the facts. We see nothing in the case which indicates that the stock redemption should be treated as the equivalent of a cash dividend. The amount of gain received in 1926 as the result of the redemption and cancellation of the stock should be taxed as capital gain. Sec. 208 (a) (1) and (8) of the Revenue Act of 1926. Reviewed by the BOARD. Judgment will be entered under Rule 50. 27 B. T. A. |