SCHNACKENBERG, Circuit Judge.
Avery Brundage and Elizabeth D. Brundage, his wife, plaintiffs, appealed from the district court’s order dismissing with prejudice and costs their complaint for a refund of federal income tax in the amount of $39,076.12, paid by them as a deficiency for the calendar year 1948, plus interest in the amount of $7,731.07 paid by them upon said defieiency, a total of $46,807.19, plus interest on said total as allowed by law.
Defendant, United States of America, having filed an answer, the facts were stipulated.
The court entered findings of fact and conclusions of law.
During the years 1944 — 1946, plaintiffs acquired 3,633 shares of 7% cumulative prior preference stock of Portland Electrie Power Company (hereinafter referred to as “Portland”), a public utility holding company, at a cost of $140,031. During 1948 plaintiffs sold all of such stock (also herein referred to as prior preference stock) for an aggregate net price of $608,063.16. They reported the difference between said cost and said sale price, i. e., $468,032.16, as long-term capital gain on their joint income tax return for 1948, and paid income tax on said gain.
The internal revenue service contended that $103,091.25 of the $468,032.16 reported by plaintiffs as long-term capital gain was constructively received by plaintiffs as a dividend and should have been reported as dividend income, and adjusted plaintiffs’ taxable income for 1948 accordingly. Based on said adjustment plaintiffs paid said deficiency.
For some years prior to 1948 Portland was involved in a bankruptcy reorganization proceeding in the United States District Court for the District of Oregon and in a proceeding before the Securities and Exchange Commission relating to its liquidation as a public utility holding company. The reorganization was consummated pursuant to a formal Plan of Reorganization 1 confirmed by the District Court on October 11, 1947.
Under this Plan, Portland General Electric Company (hereinafter referred to as “PGE”), a wholly owned operating subsidiary of Portland, was to reclassify an(j increase its authorized common stock and to issue to Portland 998,966B%o shares of such new common stock in exchange for the previously outstanding common held by Portland. PGE was also to transfer to Portland a dividend $1>600,000 in cash and $93,000 princiPa^ amount in Portland s own bonds, Portland was then to distribute cash and common stock of PGE to the holders of Portland’s bonds and prior preference and first preferred stock in exchange for ^he Portland securities held by them.2
Under the Plan, the holder of each share of prior preference stock was to receive, in exchange therefor, 6% shares [426]*426óf common stock of PGE in full satisfaction of his claims thereon, including all accrued and unpaid dividends. Holders of Portland first preferred stock were to receive ^ of a share of common stock of PGE for each share of their stock, Holders of Portland second preferred stock and common stock were to receive nothing under the Plan and these stocks were to be cancelled. The holders of pri- • or preference stock were to be given ten years after entry of final decree in the reorganization within which to exchange such prior preference stock for common stock of PGE.
The distributions of PGE stock under the Plan were based upon the value of the properties of Portland, including the P GE stock, as of October 31, 1945. Subsequent to October 31, 1945, PGE had earnings which were of a value equivalent to the interest accruing to the holders of Portland bonds after October 31, 1945, and to the accrual of dividends on the prior preference stock after that date.
Out of the retained earnings of PGE earped after October 31, 1945, its directors on July 7, 1947, declared a special dividend of $3 per share to be paid to the holders of the new common stock of PGE when and if such stock should be issued pursuant to the Plan. In confirming the Plan on October 11, 1947, the court found that the values of the properties of Portland as of October 31, 1945, plus the retained earnings of PGE, plus the said $3 special dividend, were a fair and equitable basis for the distribution of the assets of Portland to its security holders. It found that the distributions so computed would satisfy the claims of the bondholders, would enable the holders of the prior preference stock to receive the par value of such stock plus all accumulated dividends, and would leave some equity for the holders of the first preferred stock.
On November 12, 1947 and on Decernber 22, 1947, the directors of PGE dedared additional special dividends of 450 each per share to be paid to the holders of the new common stock of PGE when and if such stock should be issued pursuant to the Plan. In addition, on March 10, 1948 and June 8, 1948, the directors of PGE declared additional dividends of 450 each per share to be paid to the holders of the new common stock of PGE, such dividends to be paid to stockholders of record on March 31, 1948 and June 30, 1948, respectively. As to Portland securities which had not been exchanged on those dates, such dividends were to be paid only if and when such securities were exchanged for PGE stock and then only pursuant to an assignment of such dividends by the Independent Trustees of Poland to the holders of such secunties at the time of the exchange The ^dependent Trustees of Portland were trustees for Portland m the bankruptcy reorganization.
Upon the consummation of the Plan Portland was to be completely dissolved and liquidated and was not to have any officers or directors,
By an order of the district court in Oregon, entered subsequent to October H> 1947, the Bank of California was named exchange agent in order to execute the Plan in accordance with its provisions. The newly issued common stock of PGE was delivered to the exchange agent on or before February 2, 1948. The special dividends, previously referred to, were paid to the exchange agent and held for future distribution to the holders of Portland securities upon the exchanges being made,
From and after the effective date of the Plan (February 2, 1948) the holders of prior preference stock were entitled to exchange such stock for common stock of PGE, and to receive the dividends thereon. The final decree of the court fixed June 4, 1961, as the last date on which such exchange must be made under the Plan: If the exchange were not made by that date, the stock would become valueless in the hands of the holders-
Plaintiffs never exchanged their stock for common stock of PGE and never received the dividends declared on the PGE.' stock. Instead, plaintiffs sold their stock [427]*427at various times during 1948. During all of 1948 there was active trading in that stock, and quotations thereon were listed by the National Quotation Bureau, Incorporated, which ranged from a low of 169 to a high of 181 on the dates of sales by plaintiffs.
1. Plaintiffs contend that they were never stockholders of PGE and never received the dividends in question. While plaintiffs chose not to exchange their prior preference stock for common stock of PGE and so never directly received the dividends declared on the latter stock, they did sell their Portland stock in 1948 and it is undisputed that these sales carried the right to collect the dividends which defendant seeks to tax as income to plaintiffs. The purchasers of this stock acquired from plaintiffs the right to collect these dividends. Plaintiffs concede that they sold a "totality of rights, i.
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SCHNACKENBERG, Circuit Judge.
Avery Brundage and Elizabeth D. Brundage, his wife, plaintiffs, appealed from the district court’s order dismissing with prejudice and costs their complaint for a refund of federal income tax in the amount of $39,076.12, paid by them as a deficiency for the calendar year 1948, plus interest in the amount of $7,731.07 paid by them upon said defieiency, a total of $46,807.19, plus interest on said total as allowed by law.
Defendant, United States of America, having filed an answer, the facts were stipulated.
The court entered findings of fact and conclusions of law.
During the years 1944 — 1946, plaintiffs acquired 3,633 shares of 7% cumulative prior preference stock of Portland Electrie Power Company (hereinafter referred to as “Portland”), a public utility holding company, at a cost of $140,031. During 1948 plaintiffs sold all of such stock (also herein referred to as prior preference stock) for an aggregate net price of $608,063.16. They reported the difference between said cost and said sale price, i. e., $468,032.16, as long-term capital gain on their joint income tax return for 1948, and paid income tax on said gain.
The internal revenue service contended that $103,091.25 of the $468,032.16 reported by plaintiffs as long-term capital gain was constructively received by plaintiffs as a dividend and should have been reported as dividend income, and adjusted plaintiffs’ taxable income for 1948 accordingly. Based on said adjustment plaintiffs paid said deficiency.
For some years prior to 1948 Portland was involved in a bankruptcy reorganization proceeding in the United States District Court for the District of Oregon and in a proceeding before the Securities and Exchange Commission relating to its liquidation as a public utility holding company. The reorganization was consummated pursuant to a formal Plan of Reorganization 1 confirmed by the District Court on October 11, 1947.
Under this Plan, Portland General Electric Company (hereinafter referred to as “PGE”), a wholly owned operating subsidiary of Portland, was to reclassify an(j increase its authorized common stock and to issue to Portland 998,966B%o shares of such new common stock in exchange for the previously outstanding common held by Portland. PGE was also to transfer to Portland a dividend $1>600,000 in cash and $93,000 princiPa^ amount in Portland s own bonds, Portland was then to distribute cash and common stock of PGE to the holders of Portland’s bonds and prior preference and first preferred stock in exchange for ^he Portland securities held by them.2
Under the Plan, the holder of each share of prior preference stock was to receive, in exchange therefor, 6% shares [426]*426óf common stock of PGE in full satisfaction of his claims thereon, including all accrued and unpaid dividends. Holders of Portland first preferred stock were to receive ^ of a share of common stock of PGE for each share of their stock, Holders of Portland second preferred stock and common stock were to receive nothing under the Plan and these stocks were to be cancelled. The holders of pri- • or preference stock were to be given ten years after entry of final decree in the reorganization within which to exchange such prior preference stock for common stock of PGE.
The distributions of PGE stock under the Plan were based upon the value of the properties of Portland, including the P GE stock, as of October 31, 1945. Subsequent to October 31, 1945, PGE had earnings which were of a value equivalent to the interest accruing to the holders of Portland bonds after October 31, 1945, and to the accrual of dividends on the prior preference stock after that date.
Out of the retained earnings of PGE earped after October 31, 1945, its directors on July 7, 1947, declared a special dividend of $3 per share to be paid to the holders of the new common stock of PGE when and if such stock should be issued pursuant to the Plan. In confirming the Plan on October 11, 1947, the court found that the values of the properties of Portland as of October 31, 1945, plus the retained earnings of PGE, plus the said $3 special dividend, were a fair and equitable basis for the distribution of the assets of Portland to its security holders. It found that the distributions so computed would satisfy the claims of the bondholders, would enable the holders of the prior preference stock to receive the par value of such stock plus all accumulated dividends, and would leave some equity for the holders of the first preferred stock.
On November 12, 1947 and on Decernber 22, 1947, the directors of PGE dedared additional special dividends of 450 each per share to be paid to the holders of the new common stock of PGE when and if such stock should be issued pursuant to the Plan. In addition, on March 10, 1948 and June 8, 1948, the directors of PGE declared additional dividends of 450 each per share to be paid to the holders of the new common stock of PGE, such dividends to be paid to stockholders of record on March 31, 1948 and June 30, 1948, respectively. As to Portland securities which had not been exchanged on those dates, such dividends were to be paid only if and when such securities were exchanged for PGE stock and then only pursuant to an assignment of such dividends by the Independent Trustees of Poland to the holders of such secunties at the time of the exchange The ^dependent Trustees of Portland were trustees for Portland m the bankruptcy reorganization.
Upon the consummation of the Plan Portland was to be completely dissolved and liquidated and was not to have any officers or directors,
By an order of the district court in Oregon, entered subsequent to October H> 1947, the Bank of California was named exchange agent in order to execute the Plan in accordance with its provisions. The newly issued common stock of PGE was delivered to the exchange agent on or before February 2, 1948. The special dividends, previously referred to, were paid to the exchange agent and held for future distribution to the holders of Portland securities upon the exchanges being made,
From and after the effective date of the Plan (February 2, 1948) the holders of prior preference stock were entitled to exchange such stock for common stock of PGE, and to receive the dividends thereon. The final decree of the court fixed June 4, 1961, as the last date on which such exchange must be made under the Plan: If the exchange were not made by that date, the stock would become valueless in the hands of the holders-
Plaintiffs never exchanged their stock for common stock of PGE and never received the dividends declared on the PGE.' stock. Instead, plaintiffs sold their stock [427]*427at various times during 1948. During all of 1948 there was active trading in that stock, and quotations thereon were listed by the National Quotation Bureau, Incorporated, which ranged from a low of 169 to a high of 181 on the dates of sales by plaintiffs.
1. Plaintiffs contend that they were never stockholders of PGE and never received the dividends in question. While plaintiffs chose not to exchange their prior preference stock for common stock of PGE and so never directly received the dividends declared on the latter stock, they did sell their Portland stock in 1948 and it is undisputed that these sales carried the right to collect the dividends which defendant seeks to tax as income to plaintiffs. The purchasers of this stock acquired from plaintiffs the right to collect these dividends. Plaintiffs concede that they sold a "totality of rights, i. e., the tree as well as the fruit". It is incredible that the total sale price did not include the value of the accrued dividends, and they make no such contention. It is obvious that the value of the dividend rights sold was a part of the consideration which plaintiffs received when they sold their stock without exercising their right to collect the dividends themselves. Under these circumstances, for tax purposes the amounts of these dividends were constructively received by plaintiffs and they are accountable therefor as ordinary income.
Defendant relies upon the following sections of Treasury Regulation 111, under the Internal Revenue Code of 1939:
"Sec. 29.42-2. Income not reduced to possession.-Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. * * *
"Sec. 29.42-8. Examples of con-. structive receipt._* * * Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder. * * ~,`
Undoubtedly the underlying reason for these provisions is to be found, ii'tter alia, in Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 337, 74 L.Ed. 916, where the court said:
"~ * * The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. * * ~"
It is obvious that what plaintiffs sold was the right to obtain froni the exchange agent the PGE shares, with accumulated dividends, for which the shares of Portland were exchangeable. Thus, plaintiffs realized ordinary income to the extent of the amount of the dividends involved, which were in effect collected as a part of the sale price of their Portland stock. Hulbert v. Commissioner, 7 Cir., 227 F.2d 399, 401. Iii such circumstances, plaintiffs, as an incident to the sale of their Portland stock, disposed of their right to the income embodied in the dividends which were payable thereon. The dominant purpose of the revenue laws is the taxation of income to those who enjoy the benefit of it when paid. See Helvering v. Horst, 311 U.S. 112, 116, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655, and Fisher v. Commissioner, 6 Cir., 209 F.2d 513, 515.
In United States v. Snow, 9 Cir., 223 F.2d 103, 108, the court aaid:
"The general rule is that a right to receive ordinary income, produced by a capital asset, is not transmuted into a capital asset by the sale or assignment of the capital asset together with the right to receive the ordinary income. * *"
2. Plaintiffs make the further contention that, even if they had actually received the dividends declared by PGE, such payments would have given rise to capital gain as cash received in liquidation of Portland. They rely on § 115(c) [428]*428of the Internal Revenue Code of 1939 3 which provided:
“Amounts distributed in complete liquidation of a corporation shall be treated as in full payment' in exchange for the stock, * *
, . ,, , As to the $3 dividend declared on July I’ ou^ Oregon distiiet court found:
“ * * * Said special dividend, together with said retained earnings of Portland General Electric Company allocable to the stock to be distributed to the bondholders of debt- or, is of a value equivalent to the interest accruing upon the claims of the holders of the bonds of debtor subsequent to October 31, 1945, and that the portion represented by the stock to be allocated under the plan as amended to the prior preference stockholders is of a value equivalent to the accrual. of dividends, upon suc'h prior preference stock subsequent to October 31, 1945.
“That the value of the properties of debtor as of October 31, 1945, together with the values of the special dividend hereinbefore mentioned and the retained earnings of Portland General Electric Company, are a fair and equitable basis for the distribution of the cash and other assets of debtor as provided in said amended plan to the security holders of debtor according to their respective claims, interests and priorities.”
It is plaintiffs’ theory that said $3 dividend must be regarded as a distribution in the complete liquidation of Portland and, if constructively received by plaintiffs, it must be treated as payment in exchange for their Portland prior preference stock; and that, if plaintiffs are treated as having sold the right to such $3 dividend along with their Portland stock, then the proceeds of sale must be accorded similar treatment; in either case any gain must be taxed as capital gain.4 They rely heavily on Kirby v. Commissioner, 35 B.T.A. 578, reversed on other grounds 5 Cir., 102 F.2d 115. However, we have examined the Kirby opinion and find that in that case ordinary dividends on stock owned by a corp0rati0n were paid to the liquidating trustees of that corporation and then distributed by them to its stockholders. Those dividends were taxable to the corporation. Of course, when they were thereafter distributed to its stockholders as a part of a complete liquidation of the corporation, the taxholders were taxable on a capital gains basis only. The case at bar presents a different situation, Here the dividends on the PGE stock were never the property of Portland and therefore could not have been distributed as a liquidating dividend of Portland, These dividends were paid to the exchange agent to hold for the stoekholders who were entitled to them, which in-eluded the plaintiffs or their assignees,
Paragraph VI(C) of the Plan provides:
Holders of Prior Preference Stock upon consummation of the Plan are to receive in full satisfaction of their claims thereon, includinS a11 accrued and unpaid dividends, ^or each share of such stock, 6% shares of PGE Common Stock and the rights of the holders of such stock shall be modified and altered accordingly. ’
lt included all dividends plaintiffs were entitled to as of October 31, 1945. See Petition of Portland Electric Power Co., 9 Cir., 162 F.2d 618 where the Plan was approved.
We hold that the $3 and subsequent dividends on PGE stock were not liquidating distributions but were distributions of earned profits of PGE, a going concern, and are to be treated as ordinary dividends.
[429]*429For the reasons herein stated, the order of the district court from which plaintiffs appeal is affirmed.
Affirmed.