were held by the plaintiff for more than two years. The solution of the question, therefore, turns upon whether the loss sustained by the plaintiff upon the withdrawal of her shares was a loss resulting from their "sale or exchange." In other words, di the withdrawal of the shares constitute a sale or exchange of them within the meaning of the Revenue Act.
In determining this question, the provisions of section 115 of the Revenue Act, 26 U.S.C.A. § 115 and note, must be considered. It contains the following provisions material to the present issue:
"(c) Distributions in Liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation." Section 115(c), 26 U.S.C.A. § 115 note.
"(h) Definition of partial liquidation. As used in this section the term 'amounts distributed in partial liquidation' means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock." Section 115(h), 26 U.S.C.A. § 115(j) and note.
It will be seen that subdivision (c) requires that amounts distributed in partial liquidation of a corporation shall be treated as in part or "full payment in exchange for the stock," while subdivision (h) defines "amounts distributed in partial liquidation" to include a distribution by a corporation in complete cancellation or redemption of a part of its stock. In the present case the distribution made by each association to the plaintiff was made and accepted in complete cancellation or redemption of a part of its stock; namely, the shares held by the plaintiff. It necessarily follows that the payment was a distribution in partial liquidation of the association within the meaning of section 115(c), and it was, therefore, required to be treated for income tax purposes as in full payment in exchange for plaintiff's stock. The conclusion is inescapable that the loss she suffered in each case was a loss resulting from the exchange of a capital asset and was, therefore, a capital loss within the meaning of section 101 of the Revenue Act.
The plaintiff urges, however, that a different result is compelled by the opinion of the Circuit Court of Appeals for the Third Circuit in Commissioner v. Aaron Ward & Sons, 65 F.2d 758. An examination of the opinion of the court in that case, however, shows that it is authority only for the proposition that, upon the withdrawal by a shareholder of his shares from a building and loan association, the amount received in excess of the amount of dues paid in and which has been paid by the association from its earnings is a taxable dividend and not a liquidating dividend or gain upon the exchange of the shares. The court did not suggest that the amount paid by an association to its withdrawing shareholder in complete or partial return of the dues which she had paid in on her shares would not be a distribution in liquidation.Such a payment is obviously a return of the capital paid in by the shareholder, and is, therefore, a distribution in partial liquidation of the corporation as commonly understood, and not a distribution of surplus earnings. The transactions here involved, therefore, must be held to be distributions in partial liquidation without regard to the provisions of the Revenue Act which, as we have seen, compel a like conclusion.
I accordingly reach the following conclusions of law:
The payments made by the building and loan associations to the plaintiff in 1932 upon the withdrawal of her shares were distributions in partial liquidation of the associations and for income tax purposes are to be treated as in full payment in exchange for her shares.
The losses sustained by the plaintiff in 1932 in connection with the withdrawal of her shares from the building and loan associations were capital losses within the meaning of section 101 of the Revenue Act of 1932, 26 U.S.C.A. § 101 note.
The income tax paid by the plaintiff for the year 1932 in the sum of $16,458.94 was lawfully assessed and collected.
The plaintiff is not entitled to the refund of $9,803.23 of said amount.
I accordingly find in favor of the defendant and against the plaintiff.