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Macy v. Helvering

February 17, 1936

MACY ET AL.
v.
HELVERING, COM'R OF INTERNAL REVENUE



Appeal from the Board of Tax Appeals.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question raised upon this petition to review the Board of Tax Appeals is whether any part of profits realized from sales of stock which was acquired through the exercise of rights to subscribe therefor is taxable under section 101 of the Revenue Act of 1928 (26 U.S.C.A. ยง 101 note) at the rate of 12 1/2 per cent. as capital net gain, where the stock was sold less than two years after the rights were exercised though more than two years after the stock on which the rights were issued was acquired.

The testator, V. Everit Macy, acquired 1,350 shares of stock of the Chase Bank in April, 1926, at a cost of $347,350. On December 7, 1927, he received as a stockholder rights to subscribe for 270 additional shares at $325 per share. He exercised these rights of subscription on December 27, 1927, and paid $87,750 for the 270 additional shares. On the date of issue, the fair market value of the rights was $41.25 a right, and that of the Chase stock ex rights was $531.87 1/2 a share. On the date the rights were exercised, the market value of the Chase stock was $542.50 a share.

On June 12, 1928, the testator received as a stockholder rights to subscribe for 324 further shares at $400 per share. He exercised these rights of subscription on July 2, 1928, and paid $129,600 for the 324 additional shares. On the date of issue, the fair market value of the rights was $40 a right, and that of Chase stock ex rights was $580 a share. On the date the rights were exercised, the market value of the Chase stock was $546 a share. In May, 1929, less than two years after the testator had exercised these rights, but more than two years after he had acquired the original shares, he sold the 270 shares for $298,752.09 and the 324 shares for $358,502.51.

Article 58 of Regulations 74 issued under the Revenue Act of 1928 provides that the cost basis to a taxpayer of stock acquired through the exercise of rights to subscribe shall be the subscription price plus that portion of the cost of the original stock which the value of the rights when issued bears to the value of the stock and rights at that time.

The percentage which the value of the rights to subscribe for the 270 shares bore to the value of the stock and rights at the time the latter were issued was .071974. Accordingly, the rights then represented $25,000.17 out of the $347,350 which the original stock cost. The $87,750 paid to take up the rights, plus $25,000.17, the value of the rights when issued, made the original cost basis for the 270 shares equal $112,750.17.

The percentage which the value of the rights to subscribe for the 324 shares bore to the value of the existing stock and rights at the time the latter were issued was .064516. Accordingly, the rights then represented:

Portion of cost of original lot

of 1350 shares allocated to the

324 rights, or .064516 X

(347,350 - 25,000.17) = ...


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