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Keywords

appealcorporation

appealcorporationpiracy

Related Cases

General Utilities & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154, 35-2 USTC P 9658, 36-1 USTC P 9012, 16 A.F.T.R. 1126, 1936-1 C.B. 214

Facts

General Utilities & Operating Company, a Delaware corporation, acquired 20,000 shares of Islands Edison Company stock. In March 1928, the company declared a dividend payable in Islands Edison stock, distributing 19,090 shares to its stockholders. The Commissioner of Internal Revenue later assessed a tax deficiency, claiming that the distribution constituted a taxable gain. The company contested this assessment, arguing that the distribution was not a sale and therefore did not result in taxable income.

Petitioner alleged: ‘The Commissioner of Internal Revenue has erroneously held that the petitioner corporation made a profit of $1,069,517.25 by distributing to its own stockholders certain capital stock of another corporation which it had theretofore owned.’

Issue

Did General Utilities & Operating Company realize taxable income from the distribution of Islands Edison Company stock as a dividend?

The only question presented in this proceeding for redetermination is whether petitioner realized taxable gain in declaring a dividend and paying it in the stock of another company at an agreed value per share, which value was in excess of the cost of the stock to petitioner.

Rule

The court held that the declaration and payment of a dividend in stock does not result in taxable income if the transaction does not constitute a sale or discharge of indebtedness.

The intent of the directors of petitioner was to declare a dividend payable in Islands Edison stock; their intent was expressed in that way in the resolution formally adopted; and the dividend was paid in the way intended and declared.

Analysis

The court analyzed the intent behind the dividend declaration and the nature of the stock distribution. It concluded that the distribution was not a sale but rather a dividend payment, and thus did not create taxable income. The court emphasized that the stockholders acted merely as conduits for the transfer of stock, and the transaction was structured to avoid taxation, which did not change its fundamental nature as a dividend.

Such admitted facts plainly constituted a plan, not to use the harsher terms of scheme, artifice or conspiracy, to evade the payment of the tax.

Conclusion

The Supreme Court reversed the decision of the Circuit Court of Appeals, affirming the Board of Tax Appeals' ruling that General Utilities & Operating Company did not realize taxable income from the stock distribution.

The action of the Board of Tax Appeals is approved.

Who won?

General Utilities & Operating Company prevailed in the case because the Supreme Court upheld the Board of Tax Appeals' determination that the stock distribution did not result in taxable income.

The judgment of the court below must be reversed.

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