The opinion of the court was delivered by: WALSH
This is an action to recover an alleged overpayment of the documentary stamp tax, in the amount of $ 49,817.25. Both parties move for summary judgment. Defendant's motion is granted; plaintiff's motion is denied.
The controversy grows out of a recapitalization of the plaintiff, in the year 1950, in which it issued to the holder of each share of common stock three additional shares of the same stated value. Plaintiff claims that the new stock certificates were not taxable because they were not accompanied by a dedication of additional capital. Defendant claims that they were.
Both motions are based upon a stipulation of the underlying facts.
Plaintiff, a New York corporation, was organized on December 17, 1920, to acquire the stock of five constituent companies. It issued preferred stock with a par value of $ 100 a share and no-parcommon stock with a stated value of $ 5 a share in a combined amount of $ 48,043,675.
This amount was entered upon its books in its capital stock account.
In March, 1921 plaintiff's certificate of incorporation was amended to state its total capital in the amount of $ 113,043,675. This was to conform with the then existing New York statute which required corporations to state their capital upon the basis of the stated value of their authorized stock rather than issued stock.
No new stock was issued. The surplus account was divided into two accounts, 'capital surplus' and 'further surplus'. The capital surplus account was fixed at the difference between the capital stock account, and the amount stated as capital in the certificate of incorporation, $ 113,043,675. No tax was paid as the result of this transaction.
In 1930 and 1931 plaintiff issued to each holder of twenty shares one additional share of common stock with a stated value of $ 5 a share. The capital stock account was increased to show the addition of the newly issued shares at this stated value. The capital surplus account was reduced by the same amount so that it continued to maintain the difference between the total of the capital stock account and the amount of $ 113,043,675 stated as capital in the certificate of incorporation.
The stipulation of facts does not disclose whether a stamp tax was paid.
In 1936 the entire issue of preferred stock was retired. Although the stipulation of facts is silent as to how this was accomplished, apparently the holders of this stock were paid off in cash. The capital stock account was reduced by the aggregate par value of the preferred and this reduction was apparently offset by a reduction of the cash account. At the same time it became necessary to increase the capital surplus account so that it would continue to express the difference between the reduced capital stock account and $ 113,043,675, the amount stated as capital in the certificate of incorporation. This was done by transferring from 'Further Surplus' an amount equal to the par value of the retired stock.
On August 1, 1950, the instant recapitalization occurred. Three additional shares of stock with a stated value of $ 5 a share were issued to the holders of each share outstanding. An amount equal to the stated value of these additional shares was added to the capital stock account. A corresponding reduction was made in the capital surplus account so that it continued to express the difference between the issued capital stock and the amount stated as capital in the certificate of incorporation.
For purposes of comparison the capital stock and surplus accounts appeared as follows on January 1, 1921, December 31, 1921, 1924, 1931, 1936 and August 1, 1950:
Jan. 1, Dec. 31, Dec. 31,
1921 1921 1924
Capital Stock --
Preferred Stock $37,326,400 $38,951,700 $39,284,900
Common Stock 10,717,275 10,847,195 10,890,545
Total $48,043,675 $49,798,895 $50,175,445
Capital Surplus $126,369,006 $63,244,780 $62,868,230
Further Surplus 59,414,300 78,419,869
Total $126,369,006 $122,659,080 $141,288,009
Dec. 31, Dec. 31, Aug. 1,
1931 1936 1950
Capital Stock --
Preferred Stock $39,284,900 $... $...
Common Stock 12,006,440 12,006,440 44,281,290
Total $51,291,340 $12,006,440 $44,281,290
Capital Surplus $61,752,335 $101,037,235 $68,761,695
Further Surplus 103,416,917 69,073,984 (Not given)
Total $165,169,252 $170,111,219 $68,761,695
In 1950, Section 1800 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 1800, imposed a tax on certificates of stock measured, as provided in Section 1802(a), 26 U.S.C.A. § 1802(a), as follows:
'On each original issue, * * * of shares or certificates of stock, * * * Provided further, That where such certificates * * * are issued in a recapitalization, the tax payable shall be that proportion of the tax computed on such certificates * * * that the amount dedicated as capital for the first time by the recapitalization, whether by a transfer of earned surplus or otherwise, bears to the total par value (or actual value if no par stock)
of such certificates or shares issued in the recapitalization. * * *'
The appropriate regulation, Regulation 71, 26 C.F.R. § 113.23(e)(1) (1949) provides as follows:
'Sec. 113.23 -- Rate and computation of tax.
'(1) A tax is not payable with respect to stock issued in a recapitalization unless the recapitalization results in the dedication of an amount as capital which amount is so dedicated for the first time. Thus, where a corporation transferred an amount from capital to capital surplus in a prior recapitalization, and such corporation in a subsequent or second recapitalization transfers such amount from capital surplus to capital under such circumstances that the amount so restored to capital is clearly identifiable, a tax is not payable with respect to the amount so rededicated as capital. However, the tax is payable with respect to a transfer of capital surplus to capital by ...