Koshland v. Helvering

Supreme Court of the United States · Corporations

CorporationsStock dividendsCapital gains basispreferred stockcommon stock dividendbasiscapital gainTreasury regulations

Facts

The taxpayer bought cumulative nonvoting preferred stock of Columbia Steel Corporation in 1924 and 1926. The corporation's charter provided annual preferred dividends of seven dollars per share in cash or, at the corporation's option, one common voting share for each preferred share; from 1925 through 1928 the corporation had enough surplus to pay cash but instead paid the dividends in common stock. In 1930 the corporation redeemed the preferred at $105 per share. The Commissioner computed gain by allocating part of the preferred stock's purchase cost to the common shares previously received as dividends, thereby reducing the basis of the preferred shares and increasing gain on redemption.

Issue

When a taxpayer buys preferred shares and later receives common shares as dividends on those preferred shares, must the taxpayer, under the Revenue Acts of 1926 and 1928, apportion the original cost of the preferred shares between the preferred and the dividend common shares when calculating gain or loss on disposition of the preferred shares? More specifically, may Treasury regulations require such allocation where the dividend common shares constituted income because they gave different rights from the preferred shares?

Rule

Where a stock dividend gives the shareholder an interest different from that represented by the original shares, the shareholder receives income. Under the Revenue Act's unambiguous capital-gain provisions, gain on disposition is computed by subtracting the cost of the asset disposed of from the amount realized, and Treasury has no power by regulation to reduce that cost by treating income received from the asset as a return of capital.

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In Seattle, Nora Kim bought nonvoting preferred shares of Rain Harbor Milling, Inc. The charter allowed annual preferred dividends to be paid either in cash or, at the board's option, in voting common shares; the board chose common shares for three years, and later the company redeemed Nora's preferred shares.

When calculating Nora's gain on the redemption of her preferred shares, how should the basis issue be resolved?

Explanation. The majority rule is that a stock dividend giving the shareholder an interest different from the original holding is income. Voting common shares received on nonvoting preferred shares confer different rights, so they are not to be treated as returns of capital. Because the statute specifically uses the cost of the property disposed of, Treasury may not require basis allocation that reduces the basis of the redeemed preferred. (Derived from Koshland v. Helvering (n.d.).)