This case presents questions of income taxation applicable to stock dividends.
In 1931, Annie M. Pfeiffer, a holder of common stock in William R. Warner Corporation, received as a dividend thereon 6,291 1/4 shares of its preferred stock. She also received from the corporation in that year $200,000 cash in exchange for 2,000 shares of its preferred stock which she had received as a dividend in 1928. In her income tax return for 1931, she did not include as taxable income either the preferred stock or the $200,000 cash. She did not include the preferred stock received in that year, because she deemed it exempt from taxation under section 115(f) of the Revenue Act of 1928 (26 U.S.C.A. § 115(f) and note). She did not include the $200,000 cash as taxable income, because she considered it the proceeds from the sale of a capital asset. But she did include $180,100 thereof as taxable capital gain on the sale, computing the gain in accordance with the then effective Treasury Regulations. And she paid a tax of $22,512.50 on such capital gain.
The Commissioner assessed a deficiency on each item. He determined that the 6,291 1/4 shares of preferred stock valued at $629,125, were taxable income of 1931, because not exempt under section 115(f); and that the $200,000 cash were the proceeds of a redemption under section 115(g), 26 U.S.C.A. § 115(g) and note, and hence taxable income. He eliminated the taxable capital gain reported and assessed a deficiency on each of the items.
The taxpayer sought a review by the Board of Tax Appeals. It affirmed the Commissioner's determination that the preferred stock received in 1931 was taxable income; but reversed his determination as to the proceeds of the 2,000 shares, and said: 'The Commissioner held that the redemption of the 2,000 shares in 1931 was at such time and in such manner as to be substantially equivalent to a taxable dividend in 1931, within the meaning of section 115(g) of the Revenue Act of 1928 (26 U.S.C.A. § 115(g) and note). He erred in this since the distribution was subject to tax as a dividend in 1928 (see cases above cited). Thereafter the shares had a basis for gain or loss to the petitioner of $100 each, and they were redeemed without gain or loss to the petitioner at $100 each in 1931.'
The Commissioner acquiesced in the Board's decision. The taxpayer sought a review by the Circuit Court of Appeals. It reversed the Board's decision as to the 1931 stock dividend, on the ground that section 115(f) exempted that dividend from taxation; and it affirmed the Board's decision that the $200,000 cash was not taxable income of 1931, saying (Pfeiffer v. Comm. of Internal Revenue, 88 F.2d 3, 5): 'The appellee argues that the proceeds from the redemption in 1931 of 2,000 shares of preferred stock distributed as a stock dividend in 1928 should be considered either (a) subject to a tax as a capital gain or (b) subject to taxation as the equivalent of the distribution of a taxable dividend pursuant to section 115(g) of the Revenue Act. The question of taxability as capital gain of the $200,000 or any part thereof was not in issue before or decided by the Board of Tax Appeals. The contention that we have authority to sustain the deficiency pro tanto even though the issue was not raised before the Board nor decided by it nor assigned as error in the petition to this court for a review of the Board's decision is untenable. General Utilities & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154; Helvering v. Salvage, 297 U.S. 106, 56 S.Ct. 375, 80 L.Ed. 511. The Board held that this stock dividend redeemed in 1931 at $100 per share was taxable in the year 1928 when received and was therefore not taxable under section 115(g); that it had a basis for gain or loss of $100 per share; and that therefore there was no taxable income from the redemption. The Commissioner did not file a cross-appeal. By the provisions of section 115(g) the proceeds of the redemption of the stock can be taxed only if it occurs at such time and in such manner as to make the redemption essentially equivalent to the distribution of a taxable dividend. Since the Board did not so find, we cannot support this contention.'
The Commissioner's petition for certiorari was granted in connection with that in Helvering v. Gowran, 302 U.S. 238, 58 S.Ct. 154, 82 L.Ed. 224, decided this day.
First. As to the 1931 dividend in preferred stock, the Commissioner contends that the immunity from taxation conferred by section 115(f) did not extend to it. We hold, for the reasons stated in paragraph first of Helvering v. Gowran, that it was exempt from taxation.