Appeal from the District Court of the United States for the District of Pennsylvania; Albert Branson Maris, Judge.
Before BIGGS and CLARK, Circuit Judges, and DICKINSON, District Judge.
From time to time between the years 1919 and 1927 the appellant subscribed for shares of stock in two building and loan associations, both Pennsylvania corporations, doing business in and about the Philadelphia area. To one building and loan association the appellant made payments totalling $47,231 up until December 4, 1931, when she gave notice, in accordance with the by-laws of the corporation, of the withdrawal of her shares, none of her shares being fully paid up. To the other building and loan association the appellant made payments totalling $6,384 up until January 30, 1932, when, none of her shares being fully paid up, she gave notice in accordance with the by-laws of the corporation of the withdrawal of these shares as well.
Both building and loan associations had been forced to foreclose upon and take title to many parcels of real estate. Neither association was able to meet the appellant's demands with cash. It was thereupon agreed between the appellant and one of the building and loan associations that it would pay to the appellant a portion of the sum due in cash and would transfer to her certain parcels of real estate at book value in payment of the balance of its indebtedness to her. The other building and loan association was unable to pay any cash and therefore transferred to the appellant certain parcels of real estate at book value in payment of its indebtedness to her. These transactions were executed as contemplated and as a result thereof the appellant received properties possessing a book value in amount equal to the sums paid in by her, less the cash received by her from one of the associations. Actually, however, the appellant was out of pocket to the extent of $36,252.
The appellant claimed this loss as a capital loss upon her 1932 income tax return. The appellant's income tax return for that year disclosed a total tax liability of $16,458.94, which she paid during the year 1933. Upon July 2, 1934, however, the appellant filed a claim for refund in the sum of $9,803.23, alleging that her tax for the year 1932 had been overpaid by her in this amount. She based this claim upon a contention that the loss of $36,252, heretofore referred to, was ordinary loss within the meaning of Section 23(e)(2) of the Revenue Act of 1932, c. 209, 47 Stat. 169, 180, 26 U.S.C.A. § 23(e)(2), and was therefore deductible from her gross income and was not a capital loss within the meaning of Section 101 of that Act, 26 U.S.C.A. § 101 note. The claim for refund was rejected and thereupon the appellant brought suit in the court below pursuant to the provisions of the Tucker Act, 28 U.S.C.A. § 41(20).
The learned trial judge held that the payment and transfer of assets made to the appellant by the building and loan associations constituted a distribution in partial liquidation of the assets of those associations within the meaning of Section 115(h) of the Revenue Act of 1932, 26 U.S.C.A. § 115(h), that these distributions were payment in full for the cancelled stock of the appellant, within the meaning of Section 115(c), 26 U.S.C.A. § 115 note, and that the loss to the taxpayer resulted from the exchange of a capital asset and was therefore a capital loss within the meaning of Section 101(c)(2).
The Principles of Commissioner v. Aaron Ward & Sons, and of Hellmich v. Hellman, are not Applicable to the Case at Bar.
The appellant, relying upon the decision of this court in the case of Commissioner v. Aaron Ward & Sons, 3 Cir., 65 F.2d 758, 759, affirming a decision of the Board of Tax Appeals reported in 23 B.T.A. 1278, 1279, takes two positions: First, that a withdrawing member of a building and loan association does not make a sale or exchange of shares of stock in building and loan associations when he delivers them up for cancellation, and second, that consideration paid or given to a withdrawing member by an association does not constitute a dividend in partial liquidation of the association.
In the cited case, the taxpayer, a New Jersey corporation, subscribed to the capital stock of a building and loan association, paid a membership fee of $1 and thereafter contributed by way of monthly installments upon the shares a total of $97,000. Thereafter, the taxpayer applied to the association for the withdrawal of its investment and received $129,840, or an excess of $32,839 over the amount paid in by it for the stock.The taxpayer contended that this excess was a dividend from a domestic corporation under the provisions of Sections 201(a) and 234(a)(6) of the Revenue Act of 1924 (Act of June 2, 192j, c. 234, 43 Stat. 253, 254, 284), and was taxable as such. This court sustained the taxpayer's contention, stating, "We think the profits made and apportioned among the stockholders constituted a dividend of profits." The appellant in the case at bar takes the position that in arriving at the conclusion stated, this court necessarily held that no sale or exchange of the shares of stock took place when the taxpayer in the Aaron Ward case withdrew it investment and turned in its shares.
In the case of Hellmich v. Hellman, 276 U.S. 233, 48 S. Ct. 244, 245, 72 L. Ed. 544, 56 A.L.R. 379, also cited by the appellant, it appears that the Hellmans had brought suits, pursuant to the provisions of Title II of the Revenue Act of 1918, 40 Stat. 1057, 1058, c. 18, against the Collector to recover additional income taxes assessed against them for the year 1919. The question presented to the Supreme Court for its determination was whether or not the gains realized by the Hellmans from the amounts distributed in the liquidation of the assets of a dissolved corporation out of the its earnings and profits accumulated since February 28, 1913, were taxable to them as other gains or profits or whether the sums so distributed were "dividends" exempted from the normal tax. Subsection (a) of Section 201 of the Revenue Act of 1919 defined the term "dividend" as " * * * any distribution made by a corporation * * * to its shareholders * * * whether in cash or in other property * * * since February 28, 1913 * * * ".Subsection (c) of Section 201 provided that "Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits." The Supreme Court stated that the controlling question was " * * * whether the amounts distributed to the stockholders out of the earnings and profits accumulated by the corporation since February 28, 1913, were to be treated under section 201(a) as 'dividends,' which were exempt from the normal tax; or, under section 201(c) as payments made by the corporation in exchange for its stock, which were taxable 'as other gains or profits'", and held that the Hellmans' gains should be taxed "as other gains or profits."
The appellant contends that by parity of reasoning to Hellmich v. Hellman, supra, when subsections (a) and (c) of Section 201 of the Revenue Act of 1924 (the Act applicable in the Aaron Ward case) are read together, it is clear that the general definition of a dividend was not intended by Congress to apply to distributions made to stockholders in the liquidation of a corporation, but that Congress intended that such distributions for the purposes of taxation should be governed by Section 201(c). It follows therefore, says the appellant, that this court of necessity determined that neither sale, exchange, nor distribution in liquidation took place under the circumstances of the Aron Ward case, since under the principle enunciated by the Supreme Court in Hellmich v. Hellman, supra, if sale, exchange, or distribution in liquidation had taken place the general definition of a dividend, as set forth in Section 201(a) of the 1924 Act, upon which this court relied in reaching its decision, would have been inapplicable.
The fallacy of this argument is immediately apparent when it is remembered that it does not appear from the record of the cause at bar that the property and money here received by the appellant were paid out of earnings and profits. The burden to show such a state of facts rested upon the appellant and this burden was not met by her. Upon the contrary, the evidence shows that the assets of the two associations were frozen and no earnings or profits were available for distribution to the appellant. It is clear that the appellant was willing to take substantial losses in order to liquidate her investments. The theory upon which the appellant seeks to sustain her case is not applicable under the circumstances of the case at bar.
The appellant also cites White v. United States, 302 U.S. 281, 59 S. Ct. 17., 182, 83 L. Ed. 172, in support of her contentions. The decision of the Supreme Court in this case, however, we think is authority against the appellant's position. In the White case, the decisive question was whether under Section 23 and Section 101 of the Revenue Act of 1928, 45 Stat. 791, upon the liquidation of a corporation stockholders' losses from their investment in its stock held for more than two years were ordinary losses deductible in full from gross income, or capital losses, 12 1/2% of which was deductible under Section 101 of the Act from the tax as computed without regard to such losses. The decedent owned shares of stock in a corporation which upon liquidation paid less than the cost of the stock. The petitioners' contention was to the effect that the loss did not result from the sale or exchange of stock and therefore were not capital losses within the meaning of Section 101. The Supreme Court, interpreting Section 115(c) of the 1928 Act, similar to Section 115(c) of the Act sub judice, held that the stockholders sustained a capital loss. The ...