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corporation

corporationregulation

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Strassburger v. Commissioner of Internal Revenue, 124 F.2d 315, 42-1 USTC P 9173, 28 A.F.T.R. 650

Facts

Emil H. Strassburger, the sole owner of a corporation's common stock, received a stock dividend of 50 shares of nonvoting, cumulative 7% preferred stock declared out of surplus accumulated after February 28, 1913. The corporation made appropriate entries in its books, decreasing surplus by $5,000 and increasing capital stock by the same amount. The preferred stock was not cancelled or redeemed, nor sold by Strassburger, leading to the question of whether this stock dividend constituted taxable income.

The question before us therefore comes down to whether a stock dividend in preferred stock to the sole owner of the common stock, which was the only class of stock outstanding, may be regarded as income within the meaning of the Sixteenth Amendment.

Issue

Is a stock dividend of preferred stock received by the sole stockholder of a corporation, which had only common stock outstanding, taxable income under the Sixteenth Amendment?

The question is whether such stock dividend was taxable income to the sole stockholder upon receipt thereof in 1936.

Rule

A stock dividend is not taxable as income if it does not change the stockholder's proportionate interest in the corporation's net assets, as established in Eisner v. Macomber. However, if the stock dividend provides the stockholder with an interest different from that represented by their previous stockholdings, it may be considered taxable income.

It is implicit in this provision that Congress intended to tax stock dividends to the full extent of its constitutional power; and so the regulations expressly declared.

Analysis

The court analyzed whether the stock dividend of preferred stock changed the character of Strassburger's corporate ownership. It concluded that the preferred stock conferred different rights, such as priority in dividends and liquidation preferences, which represented an interest distinct from the common stock. Therefore, the court determined that the stock dividend constituted taxable income under the principles established in Koshland v. Helvering.

The preferred stock had the prior right to dividends and a preference on liquidation of the corporation; and these rights could be disposed of without affecting the voting control residing in the common stock.

Conclusion

The court affirmed the Board's decision that the stock dividend was taxable income, concluding that the change in the nature of the stock ownership warranted taxation.

Order affirmed.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court upheld the Board's ruling that the stock dividend was taxable income based on the change in the nature of the stock ownership.

The legal quality of what the taxpayer has after such distribution is different from that which he had before.

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O’Sullivan Rubber Co. v. Commissioner of Internal Revenue, 120 F.2d 845, 41-2 USTC P 9521, 27 A.F.T.R. 529

Henry T. Patterson Trust by Reeves Banking & Trust Co. v. U.S., 729 F.2d 1089, 53 A.F.T.R.2d 84-1042, 84-1 USTC P 9315

Atlantic Commerce & Shipping Co., Inc. v. C. I. R., 500 F.2d 937, 34 A.F.T.R.2d 74-5667, 74-2 USTC P 9624

Libson Shops, Inc. v. Koehler, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924, 57-1 USTC P 9691, 51 A.F.T.R. 43, 1957-2 C.B. 891

Bedford’s Estate v. Commissioner of Internal Revenue, 144 F.2d 272, 44-2 USTC P 9441, 32 A.F.T.R. 1183