Appeal from the United States Board of Tax Appeals.
Before L. HAND, AUGUSTUS N. HAND and CHASE, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The question before us is whether, in computing income taxes upon gain realized through the exchange by the petitioner of certain shares of preferred stock of Bulova Watch Co. for cash and common stock, the tax should be laid under § 115(c) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 868, upon 100% of the gain because the distribution was a partial liquidating dividend, or under § 117(a), 26 U.S.C.A. Int. Rev. Acts, page 873, upon only 30% of the gain because the distribution was not a partial liquidating dividend.
For more than ten years prior to October 22, 1936, te taxpayer owned 900 shares of no par convertible preferred stock of the Bulova Watch Co. cumulative as to dividends of $3.50 per annum, having a cost basis of $30,985. The capital of the company consisted of 50,000 shares of preferred stock without par value, all outstanding, and 325,000 shares of common stock without par value, of which 275,000 shares were outstanding and 50,000 were held in reserve for conversion of the preferred stock.The preferred stock could be redeemed by the company at $55 per share.
On August 24, 1936, the company offered holders of its preferred stock a "Plan of Exchange", under which, if consummated, each holder of preferred stock would be entitled to receive for each share surrendered for cancellation (1) one share of common stock, (2) $22.50 in cash, and (3) dividends accrued and accruing and unpaid to December 1, 1936, of $17.50 per share. It was a part of the plan that "pursuant to the Articles of Incorporation, as amended, * * * all Preferred Stock exchanged under the Plan will be retired and shall not be reissued".
The plan was accepted by the petitioner and other holders of preferred stock aggregating 49,861 shares. As a result, the petitioner on October 22, 1936, surrendered her 900 shares of preferred stock and received in exchange $21,037.50 of cash and 900 shares of common stock having a market value of $32.50 per share, or a total of $50,287.50. In addition to this, she received $15,750 in payment of accumulated dividends accrued to December 1, 1936, upon her 900 shares of preferred stock.Of the remaining 139 shares of preferred stock outstanding after the exchange of the 49,861 shares in 1936, 20 were converted into common on February 8, 1937, and 119 were redeemed on March 1, 1937, thus completely eliminating the entire 50,000 preferred shares.
It is apparent from the foregoing, and indeed is conceded, that the taxpayer realized a gain on surrender of the preferred stock. That such was the case appears from the following computation: Cash $21,037.50 Common stock (900 shares) having a market value of $32.50
Total $50,287.50 Less cost basis of 30,985.00
The Commissioner and the Board of Tax Appeals each held that the above gain arose from a partial liquidation as defined in $115(i) of the Act of 1936 and that the tax, therefore, was to be computed upon 100% of the gain pursuant to § 115(c) rather than upon 30% of the gain under § 117(a).
Section 115(i) reads as follows: "(i) Definition of partial liquidation. As used in this section the term 'amounts distributed in partial liquidation' means a distribution by a corporation in complete cancelation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or rememption of all or a portion of its stock."
Section 115(c) of the Act of 1936 relating to distributions in liquidation provides that: "Despite the provisions of § 117(a), 100 per centum of the gain * * * recognized shall be taken into account in computing net income, except in the case of ...